ESRB Responds to EC Proposal on Solvency II Review
The European Insurance and Occupational Pensions Authority (EIOPA) published the technical information on the symmetric adjustment of the equity capital charge as well as the technical information on relevant risk-free interest rate term structures for Solvency II with reference to the end of January 2022. In addition, the European Systemic Risk Board (ESRB) issued a letter, which is addressed to both members of the European Parliament and the Council Working Party, on the European Commission proposal on Solvency II review. In the letter, the European Systemic Risk Board (ESRB) outlines ways to strengthen the proposal to fully close important gaps in the Solvency II Directive.
The letter explains that the following elements require further strengthening:
- Failing to address solvency risks that arise from the low levels of interest rates and volatile capital markets will result in solvency ratios being overstated, leading to fragile insurers with a higher risk of failure. The application of a more market-based method for deriving risk-free discount rates for insurers, which sets the last liquid point for the euro to 30 years and extends the convergence period from the last liquid point to the ultimate forward rate from 40 years to 100 years, is an important tool with which to address this risk.
- Risks from distributions, such as dividends or share buybacks, can lead to a depletion of capital and insurers might try to conserve capital elsewhere by de-risking. Such de-risking strategies can amplify exceptional market-wide shocks.
- Risks from mortgage lending are closely related to real estate risks and insurers in certain European countries invest up to 14% of their total assets in mortgage loans. Despite continuing concerns about rising real estate prices in the European Union, insurers in many countries may engage in mortgage lending by applying lower capital requirements than banks. ESRB welcomes the intention of EC to better align the prudential treatment of mortgage loans in Solvency II with the credit risk framework for the banking sector. However, the provisions for borrower-based measures for mortgage lending that apply independently of which part of the financial sector provides a loan are lacking. These measures are important to address the risks of residential real estate bubbles and rising foreclosures when the bubbles burst.
- Risks from procyclical investment behavior can arise when insurers are forced to sell commonly held or correlated assets during times of stress. During the market turmoil in March 2020, insurance supervisors in some countries resorted to the existing transitional measures to smooth the impact of the sharp falls in asset prices. These measures, however, were not designed for this purpose, and this is problematic, as they will continue to provide capital relief for the next ten years. Improving existing mechanisms in Solvency II, including by making the countercyclical mechanism more symmetric, is therefore important.
The European Commission had, in July 2020, launched a consultation on the review of Solvency II Directive, with ESRB having responded to this consultation in October 2020. Then, in September 2021, the European Commission issued a proposal on the review of Solvency II incorporating many important issues flagged by ESRB in its earlier response. The annex to this recent ESRB letter includes an overview table that summarizes which of the elements set out in the ESRB response to the European Commission’s consultation on the Solvency II review were largely incorporated in the European Commission proposal and which of them were not or only partially incorporated.
Related Links
- Press Release Technical Information for Solvency II
- Press Release on Symmetric Adjustment
- ESRB Letter to Members of European Parliament (PDF)
- ESRB Letter to Council Working Party (PDF)
Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, Dividend Distribution, Mortgage Lending, Lending, Credit Risk, EIOPA, ESRB, EC, RRE, CRE
Featured Experts
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Brian Robinson
Actuary; risk management specialist; corporate and capital modelling expert
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.