EIOPA is consulting on an opinion that sets out technical advice for the 2020 review of Solvency II. The opinion, once finalized, will respond to the call for advice of EC on the 2020 Solvency II review. The key topics covered in the consultation include 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 comment period on this consultation ends on January 15, 2020 and EIOPA plans to issue the final advice in June 2020.
The EC call for advice comprised 19 topics that can be broadly categorized into three areas. The first topic is on the review of the long-term guarantee measures, with a number of different options being consulted on, notably on extrapolation and on the volatility adjustment. The second topic addresses the potential introduction of new regulatory tools in the Solvency II Directive, notably on macro-prudential tools, recovery and resolution, and insurance guarantee schemes. These new regulatory tools are considered thoroughly in the consultation. The third and final topic involves revisions to the existing Solvency II framework, including in relation to freedom of services and establishment, reporting and disclosure, and the solvency capital requirement. This consultation covers all areas of the call for advice, except the insurance guarantee schemes and the topics on reporting and disclosure that have been already consulted on.
Overall, EIOPA opines that the Solvency II framework is working well. Therefore the approach in the consultation paper is of evolution rather than revolution. The key considerations and proposals of this consultation are as follows:
- Considerations to choose a later starting point for the extrapolation of risk-free interest rates for the euro or to change the extrapolation method to take into account market information beyond the starting point.
- Considerations to change the calculation of the volatility adjustment to risk-free interest rates, in particular to address overshooting effects and to reflect the illiquidity of insurance liabilities. The advice includes proposals to strengthen the public disclosure on the long term guarantees measures and the risk management provisions
- The proposal to increase the calibration of the interest rate risk sub-module in line with empirical evidence, in particular the existence of negative interest rates. The proposal is consistent with the technical advice EIOPA provided on the Solvency Capital Requirement standard formula in 2018.
- The proposal to include macro-prudential tools in the Solvency II Directive. EIOPA proposes a comprehensive framework, covering the tools initially considered by EC as well as other tools that EIOPA considers necessary to equip national supervisory authorities with sufficient powers to address the sources of systemic risk in insurance. The tools initially considered by EC include improvements in Own Risk and Solvency Assessment, the prudent person principle, and the drafting of systemic risk and liquidity risk management plans.
- The proposal to establish a minimum harmonized and comprehensive recovery and resolution framework for insurance. In the advice, EIOPA focuses on the recovery measures including the request for pre-emptive recovery planning and early intervention measures. Subsequently, the advice covers all relevant aspects around the resolution process, such as the designation of a resolution authority, the resolution objectives, and the need for resolution planning and for a wide range of resolution powers to be exercised in a proportionate way. The last part of the advice is devoted to the triggers for early intervention and entry into recovery and into resolution.
EIOPA also published a qualitative impact assessment of the combined impact of all proposed changes. For technical options on certain topics, it also includes a quantitative assessment of costs. The qualitative analysis will be supplemented with the analysis of the data gathered though the information request to national supervisory authorities and insurance and reinsurance undertakings in parallel to the public consultation. Furthermore, in 2020, EIOPA will collect data to assess the quantitative combined impact of the proposals to be included in the advice.
Comment Due Date: January 15, 2020
Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, Recovery and Resolution, Macro-Prudential Tools, SCR, Own Funds, Reporting, Proportionality, EIOPA
Previous ArticleDNB Proposes Lower Limit on Risk-Weighting of Mortgage Loans
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).