Featured Product

    ESRB Responds to EC Consultation on Review of Solvency II

    October 19, 2020

    ESRB responded to the EC consultation on review of Solvency II regime. In its response letter, ESRB reinforced the need to better reflect macro-prudential considerations in Solvency II, establish a harmonized recovery and resolution framework across EU, ensure appropriate capturing of risks under Solvency II. ESRB also explained that the recent events linked to the COVID-19 pandemic should be analyzed and taken into account in the review, as they shed a new light on the strengths and weaknesses of the insurance sector. In the Annex to the response letter, ESRB also responded to certain issues raised by EC that concern the role of ESRB role in the prevention or mitigation of systemic risks to financial stability.

    To better reflect macro-prudential considerations in Solvency II, in an earlier report and in this letter, ESRB advocated the use of solvency tools for preventing and mitigating procyclical investment behavior and liquidity tools. The framework for liquidity risk should be enhanced by better reporting and measurement, stress-testing requirements and Pillar 2 provisions that enable supervisors to require the insurers that have been identified as having a vulnerable liquidity profile, to maintain a liquidity buffer. ESRB also sets out tools for addressing risks stemming from the provision of credit to the economy, for example, when insurers originate mortgage loans or invest in corporate bonds. ESRB also believes that the provisions of Article 138 of Solvency II Directive (2009/138/EC) on the extension of the recovery period could be clarified with respect to the role of ESRB. The recovery and resolution framework, along with additional harmonization in the area of insurance guarantee schemes, would contribute to adequately protect policyholders as well as maintain financial stability in EU. ESRB also sees the need to adjust the risk-free interest rate term structure, particularly given the persistent low interest rate environment. ESRB explains that, based on the lessons learned from the pandemic, the Solvency II review should consider: 

    • Strengthening micro-prudential framework with a macro-prudential toolkit to ensure the provision of critical insurance services as well as the insurance functions that might have a significant impact on the financial system or the real economy
    • The need to build-up a buffer of capital ex-ante that provides additional resilience when needed
    • Granting, to supervisors, the power to block or suspend dividend payouts or equivalent activities when insurers are not breaching their solvency capital requirements
    • Measures to address volatility of the solvency ratio by, for example, increasing the cap for symmetric adjustment for equity risk in a symmetric way and by transforming the Volatility Adjustment (VA) into a symmetric VA that would form an additional own funds item to mitigate some of the credit spread volatility.
    • Enhancing the liquidity risk management requirements for insurers by establishing proportionate and systematic reporting requirements and granting supervisors the power to impose liquidity buffers for insurers with a vulnerable risk profile (in addition to the need to reinforce the risk management provisions of Solvency II on liquidity risks)

    In the Annex to the response letter, ESRB addresses the topics of long-termism and sustainability of insurers’ activities and priorities of the European framework, proportionality of the European framework and transparency toward the public, and improving trust and deepening the single market in insurance services. ESRB also emphasizes the need for requiring insurers to explicitly reflect climate change risks and cyber risks in their risk management practices and to adequately address the situation of negative interest rates in Solvency II.

     

    Related Link: Response Letter (PDF)

     

    Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, COVID-19, Reporting, Liquidity Risk, Solvency Capital Requirement, Climate Change Risk, ESG, EC, EIOPA

    Featured Experts
    Related Articles
    News

    EBA Updates Filing Rules for Supervisory Reporting

    The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure of Investment Policy Under IFR

    The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).

    October 19, 2021 WebPage Regulatory News
    News

    APRA Finalizes Guidance for New Prudential Standard on Remuneration

    The Australian Prudential Regulation Authority (APRA) published the prudential practice guide CPG 511 to assist banks, insurers, and superannuation licensees in meeting requirements of CPS 511, the new prudential standard on remuneration.

    October 18, 2021 WebPage Regulatory News
    News

    OCC Updated LIBOR Self-Assessment Tool for Banks

    The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR).

    October 18, 2021 WebPage Regulatory News
    News

    TCFD Updates Guidance for Financial Disclosures on Climate Risk

    The Financial Stability Board (FSB) published a report that examines the progress made toward disclosures aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

    October 14, 2021 WebPage Regulatory News
    News

    BCBS Report Examines Progress on Adoption of Basel III Framework

    The Basel Committee on Banking Supervision (BCBS) published the progress report on adoption of the Basel III regulatory framework in member jurisdictions.

    October 14, 2021 WebPage Regulatory News
    News

    ACPR Implements Updates Related to DPM Version 3.1

    The French Prudential Supervisory Authority (ACPR) has implemented, in its information system, updates linked to the Data Point Model (DPM) version 3.1.

    October 14, 2021 WebPage Regulatory News
    News

    EBA Note Examines Transition Risks of Benchmark Rates

    The European Banking Authority (EBA) published a thematic note that aims to identify and raise awareness of the transition risks of benchmark rates, as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA) are close to being phased out.

    October 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7571