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March 27, 2018

The EIOPA Chairman Gabriel Bernardino spoke at the Public Hearing on the 2018 Review of the Solvency II Delegated Regulation in Brussels. He highlighted the need to ensure that "the regime remains fit-for-purpose, works for insurance companies of all sizes and types, and that we continue to preserve regulatory certainty." He mentioned that, in its Advice to EC, EIOPA analyzed 29 topics focused on the three main areas—that is, increasing proportionality, removing unjustified constraints to financing the economy, and removing technical inconsistencies.

With respect to proportionality, the focus was on small and medium-size insurers and reduced granularity, where risk profiles justified this. EIOPA advised to further simplify calculations for a number of sub-modules such as natural, manmade, and health catastrophes. To reduce over-reliance on external credit ratings in the calculation of the Solvency Capital Requirement or SCR, EIOPA recommended applying simplified calculations by nominating only one credit rating agency and calculating capital requirements for the remaining non-complex assets only subject to the credit quality step 3. One of the main simplifications is the reduced burden on the treatment of lookthrough to underlying investments. Access to data was always an issue and EIOPA recommended allowing the grouping of underlying exposures and simplifications for the calculation of capital requirements. This change should be a significant relief in terms of administrative burden. Other simplifications included relief in the assessment of lapse and counterparty default risks.

Other topics that constitute a substantial part of the EIOPA Advice, according to the EIOPA Chairman, are interest rate risks, loss-absorbing capacity of deferred taxes, and risk margin. To improve calculation of capital requirements for interest rate risks, EIOPA recommended to implement new calibrations (current calibration with data up to 2008) that take recent evidence such as negative rates into account. Given the material impact on the capital requirements for certain types of insurers, EIOPA suggested to implement the methodology gradually over three years to mitigate the impact. To strike a reasonable balance between flexibility and foster greater supervisory convergence, EIOPA developed a set of key principles, consistent with the Solvency II framework, that allow proportionality and flexibility in the calculation while increasing the comparability of outcomes. He also added that, "we are of the opinion that the cost-of-capital needs to be kept on the same level while the review of other aspects of the risk margin should be assessed in the upcoming overall review of the Solvency II regime scheduled for 2021."

Finally, Mr. Bernardino emphasized that, with the changes proposed in the two sets of Advice by EIOPA, accompanied by a full impact assessment, complexity will be reduced while a proportionate, technically robust, risk-sensitive, and consistent supervisory regime for the insurance sector is retained. He concluded that "the proposed adjustments will reinforce Solvency II as a modern, risk-based, and proportionate regime; a European regime that is the worldwide reference on insurance regulation."

 

Related Link: Speech (PDF)

Keywords: Europe, EU, Insurance, Solvency II, 2018 Review, Proportionality, SCR, EIOPA

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