EIOPA Publishes Final Advice Resulting from 2020 Solvency II Review
EIOPA published the opinion on the 2020 review of the Solvency II regime. Overall, EIOPA notes that the Solvency II framework is working well from the prudential perspective and no fundamental changes are needed, rather a number of adjustments are required to ensure that the regulatory framework continues as a well-functioning risk-based regime. The opinion also reflects the need to supplement the current micro-prudential framework with a macro-prudential perspective, including the introduction of specific tools and measures to equip supervisors with sufficient powers to address all sources of systemic risk. EC proposal on the review is expected in the third quarter of 2021.
The proposed measures aim to keep the regime fit-for-purpose by introducing a balanced update of the regulatory framework, reflecting better the economic situation, and completing the missing elements from the regulatory toolbox; in short, these three areas form the EIOPA approach to Solvency II review. The EIOPA opinion considers the 19 topics covered in the EC call for advice (published in February 2019) to EIOPA on the review of the Solvency II Directive. As included in the opinion, the key proposals from EIOPA include the following:
- Adjustments to the capital treatment of interest rate risk, reflecting the steep fall of interest rates experienced during the last years and the existence of negative interest rates; recommendation for changes to the interest rate curves used by insurers to value liabilities, specifically in respect of the method of extrapolating risk-free rates to better reflect market reality
- Improvements to the volatility adjustment to better align the design to its objectives and increase its effectiveness in curbing short-term volatility and rewarding insurers for holding illiquid liabilities
- Refinements to the calculation of the risk margin of insurance liabilities, recognizing diversification over time, thus reducing its volatility and size, in particular for long-term liabilities
- Revisions to the criteria for the ability to hold equity long-term, by making a link with long-term illiquid liabilities, with the aim to better reflect risks and further encourage long term investments
- Clear risk-based quantitative criteria to identify low-risk undertakings eligible for applying proportionality measures, by recommending the introduction of a new process for applying and supervising the principle of proportionality
- Support for efficient exchange of information among national supervisory authorities during the process of authorization and in case of material changes in cross-border activities
- Establishment of a minimum harmonized and comprehensive recovery and resolution framework and the introduction of a European network of national Insurance Guarantee Scheme that should meet a minimum set of harmonized features with the primary aim to protect policyholders—paying compensation when needed or ensuring the continuation of insurance policies
Accompanying the opinion are several documents, including
- Factsheet providing an overview of the opinion
- Background document setting out the analysis that the EIOPA technical advice for the 2020 review is based on and an annex to this document covering natural catastrophe (nat cat) policy conditions
- Impact assessment of individual policy options per topic, for the advice
EIOPA also published a report on quantitative reporting templates and annexes containing templates and related instructions; this material covers the Individual Quantitative Reporting Templates at solo and group levels, including Financial Stability Reporting. This report aims to provide stakeholders the full view of the future reporting and disclosure requirements, as a complement of the legislative proposals in this area covered by the Opinion. The document contains information on the templates proposed for deletion, templates proposed for simplification, new templates proposed for inclusion, and the revision and inclusion of new risk-based thresholds to provide an understanding of the reporting and disclosure framework envisaged by EIOPA, particularly the application of the proportionality principle in reporting requirements. Based on the proposals included in this document, EIOPA will propose amendments to the implementing technical standards on reporting and disclosure and will revise the EIOPA guidelines on Financial Stability Reporting in accordance with its mandate.
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Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, ESG, Resolution Framework, Reporting, Proportionality, Macro-Prudential Framework, Disclosures, Opinion, Solvency Capital Requirements, EIOPA
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