EIOPA Report Analyzes Use and Impact of Long-Term Guarantee Measures
EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2019 and fourth annual report on long-term guarantee measures and measures on equity risk. The analysis carried out by EIOPA in the annual reports on long-term guarantees measures and measures on equity risk will serve as a basis for the Opinion on the 2020 review of Solvency II. This year's results show that most of the measures are widely used. Consistent with the trends observed in the last years, availability of long-term guarantee products is mainly stable or decreasing across the European Economic Area. Overall, the national supervisory authorities have observed a decrease in the size and duration of guarantees.
The results show that 699 insurance and reinsurance undertakings in 22 countries with a European market share of 75% use at least one of the following voluntary measures:
- The matching adjustment
- The volatility adjustment
- The transitional measures on the risk-free interest rates
- The transitional measures on technical provisions
- The duration-based equity risk sub-module
The volatility adjustment and the transitional measure on technical provisions are particularly widely used. The volatility adjustment is applied by 660 undertakings in 22 countries to mitigate the effect of exaggerations of bonds spreads. The transitional measure on technical provisions is applied by 159 undertakings in 11 countries with respect to contracts concluded before the start of Solvency II to ensure a smooth transition to the new regime. The average Solvency Capital Requirement ratio of undertakings using the voluntary measures is 235% and would drop to 159% if the measures were not applied. This confirms the importance of these measures for the financial position of insurance and reinsurance undertakings.
In addition to the long-term voluntary measures, the report analyzes the impact of the extrapolation of risk-free interest rates; for that purpose, an information request to insurance and reinsurance undertakings was carried out by EIOPA. Undertakings assessed the impact of two scenarios to change parameters of the extrapolation. At EUR level, scenario 1 (increase of the last liquid point for the euro from 20 to 30 years) would result in a reduction of the Solvency Capital Requirement ratio by 31 percentage points and scenario 2 (increase of the last liquid point for the euro from 20 to 50 years) would result in a reduction of the Solvency Capital Requirement ratio by 52 percentage points.
The Solvency II Directive requires a review of the long-term guarantee measures and the measures on equity risk until January 01, 2021. As part of this review, EIOPA reports annually on the impact of the application of the long-term guarantee measures and the measures on equity risk to the European Parliament, the Council of the European Union, and EC. EIOPA also plans to submit the opinion on the assessment of the application of the long-term guarantee measures and the measures on equity risk to EC in 2020, based on the annual reports submitted by then. EIOPA will provide its final assessment, including eventual proposed changes regarding the measures, by June 30, 2020.
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Keywords: Europe, EU, Insurance, Solvency II, Long-Term Guarantee, Matching Adjustment, Volatility Adjustment, SCR, EIOPA
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