ESRB Responds to EIOPA Consultation on 2020 Review of Solvency II
ESRB published its response to the EIOPA consultation paper on review of Solvency II. ESRB highlighted that, although Solvency II has helped strengthen safety of individual insurers and EIOPA has been central to making the new regime a success, certain gaps exist in the current framework. ESRB points out that it welcomes the review and the consultation of EIOPA the ongoing review of Solvency II, which is a unique opportunity to close the existing gaps in the years to come. The EIOPA consultation covers topics such as long-term guarantee measures, measures on equity risk, technical provisions, own funds, standard formula for solvency capital requirement, calculation of minimum capital requirement, reporting and disclosures, proportionality, group supervision, macro-prudential policy, and recovery and resolution.
The proposals set out in the response to the consultation paper by EIOPA reflect the positions that ESRB has taken over the past few years. These proposals have been grouped under three broad headings, which reflect the topics that ESRB considers most pertinent with regard to their systemic impact:
- Better reflect macro-prudential considerations in Solvency II. The response letter discusses enhancement of the macro-prudential dimension of Solvency II and extension of the recovery period under Article 138 of Solvency II. The section on enhancing the macro-prudential dimension of Solvency II sets out the solvency, liquidity, and horizontal tools proposed by ESRB to reflect the macro-prudential considerations that have been identified in a report approved by the ESRB General Board in 2019 as necessary to enhance Solvency II.
- Establish harmonized recovery and resolution framework across EU. ESRB agrees with the draft advice by EIOPA on the need for a harmonized recovery and resolution framework across EU. The ESRB General Board considered recovery and resolution of the insurance sector and published its views in a report in 2017. This report concludes in favor of a harmonized effective recovery and resolution framework for insurers and sets out points that such a framework should include.
- Continue to ensure that risks are properly captured under Solvency II. EIOPA consultation paper considers options for the calculation of risk-free interest rate term structure. ESRB welcomes the analysis by EIOPA, as it sees the need to adjust the risk-free interest rate term structure to better meet macro-prudential considerations. ESRB considers it important that the resilience of the insurance sector to property risks is not weakened at the current juncture. ESRB identified vulnerabilities in both commercial real estate and residential real estate that should be considered in any recalibration of property risk.
In addition, ESRB welcomes that EIOPA is giving ample consideration to the principle of proportionality in its consultation paper. Some of the proposals set out in the response interact with those made in the EIOPA consultation paper. To better understand this interaction and to support the further calibration of the tools, it would be important for EIOPA to consider these proposals in its impact assessment. This is particularly relevant for the symmetric volatility adjustment, which can be integrated into the own proposals of EIOPA for this measure.
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Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, Recovery and Resolution, Macro-prudential Tools, Proportionality, Reporting, SCR, Response to Consultation, EIOPA, ESRB
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