EIOPA Welcomes EC Proposals on Review of Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) welcomed the proposals of the European Commission (EC) on the review of Solvency II Directive. The proposals largely share EIOPA’s approach and follow the objectives set in EIOPA’s opinion on the review of Solvency II from December 2020. In particular, EIOPA welcomed the proposals to develop an Insurance Recovery and Resolution Directive, to include the macro-prudential perspective in Solvency II, to enhance the proportionality principle, and to give mandates for further action on sustainable finance. The new extrapolation methodology of the risk-free curve, the adjustments of the interest risk rate, and the additional tools and measures to address systemic risk are also welcome steps.
From a perspective of consumer protection, EIOPA deeply regrets that the minimum harmonization of the Insurance Guarantee Schemes at the European Union level has not been considered. The review of Solvency II and the newly proposed Insurance Recovery and Resolution Directive constituted an excellent window of opportunity to address the existing fragmentation in the field of Insurance Guarantee Schemes. As a result of the current fragmentation, policyholders receive different levels of protection in the event of an insurer’s failure operating within the European Union, depending on the country from where the insurance policy originates. Consequently, EIOPA continues to believe that this issue needs to be tackled as it may seriously undermine the functioning of and trust in the European Single Market.
To avoid scenarios that harm policyholders, an important element of Solvency II is its prudence. The EIOPA advice recommended a more favorable but prudent treatment of illiquid liabilities as well as a balanced update overall. In the view of EIOPA, the removal of illiquidity considerations for the purpose of volatility adjustment calculations on the one hand and relaxations regarding the calibration on the risk margin and interest risk capital charge on the other pose potential risks. While EIOPA is pleased with the consideration taken on board that low-risk insurers would be relieved of certain requirements, it is important that the proportionality principle in Solvency II is embedded in the supervisory review process. This approach would give the supervisors more flexibility to allow application by insurers of proportionality also during the supervisory review process. This would keep proportionality as a principle instead of transforming it into a "set of rules." EIOPA states that it stands ready to support the European Commission, Parliament, and Council in the review process.
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Keywords: Europe, EU, Insurance, Reinsurance, Solvency II, Sustainable Finance, Resolution Framework, Proportionality, Insurance Guarantee Schemes, Interest Rate Risk, Insurance Recovery and Resolution Directive, Climate Change Risk, EC, EIOPA
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