ESRB published a report identifying a shortlist of options for additional provisions, measures, and instruments that ESRB deems sufficiently promising to warrant further work. The report complements the work undertaken by EIOPA and reaches broadly similar conclusions. The shortlisted options would address the key systemic risk types by targeting several significant systemic amplifiers, sectoral vulnerabilities, and transmission channels.
The shortlisted options in the report were selected on the basis of expert judgment since, as Solvency II has only recently come into effect, the data reported do not yet support a comprehensive time series analysis. The shortlisted options reflect the specificities of the (re)insurance business and their functioning naturally differs from the toolkit that was developed for other financial sectors (for example, banking). The shortlisted options would form part of a comprehensive regulatory framework. First, as part of making (re)insurers safer to protect policyholders, the shortlisted options include a proportionate extension and enhancement of micro-prudential reporting requirements. Second, as part of providing legal certainty in case an (re)insurer runs into difficulties and to ensure that any failure is orderly, they confirm the financial stability benefits of a harmonized EU-wide recovery and resolution framework. Third, as part of a macro-prudential toolkit to target systemic risks, they include the possibility for the following:
- A power for authorities to impose, entity-based and/or activity/behavior-based market-wide capital increases and dividend restrictions in situations in which (re)insurance market developments could generate systemic risk
- Symmetric capital requirements for cyclical risks
- Liquidity requirements for (re)insurers with a vulnerable liquidity profile
- A discretionary power for authorities to intervene in cases of mass lapses
- Instruments to target bank-like activities to ensure cross-sectoral consistency of macro-prudential policy
With the exception of the symmetric capital requirements for cyclical risks, which partly interact with measures already present in Solvency II, in particular the volatility adjustment (VA) and the matching adjustment (MA), the shortlisted options address the macro-prudential aspects not captured by the current EU regulation. Further work should consider international developments, changes in current regulation, and determine the appropriate level of legislation. As the potential implementation of any of the shortlisted provisions, measures, and instruments would require legislative changes, it would typically be accompanied by an impact assessment. One of the key elements of any future work would be to consider the extent of the legislative changes needed to implement certain provisions, measures or instruments and to consider the appropriate level of legislation.
Related Link: ESRB Report (PDF)
Keywords: Europe, EU, Insurance, Solvency II, Macro-prudential Measures, Systemic Risk, ESRB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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