Featured Product

    ESRB Responds to EC Consultation on Review of Solvency II

    October 19, 2020

    ESRB responded to the EC consultation on review of Solvency II regime. In its response letter, ESRB reinforced the need to better reflect macro-prudential considerations in Solvency II, establish a harmonized recovery and resolution framework across EU, ensure appropriate capturing of risks under Solvency II. ESRB also explained that the recent events linked to the COVID-19 pandemic should be analyzed and taken into account in the review, as they shed a new light on the strengths and weaknesses of the insurance sector. In the Annex to the response letter, ESRB also responded to certain issues raised by EC that concern the role of ESRB role in the prevention or mitigation of systemic risks to financial stability.

    To better reflect macro-prudential considerations in Solvency II, in an earlier report and in this letter, ESRB advocated the use of solvency tools for preventing and mitigating procyclical investment behavior and liquidity tools. The framework for liquidity risk should be enhanced by better reporting and measurement, stress-testing requirements and Pillar 2 provisions that enable supervisors to require the insurers that have been identified as having a vulnerable liquidity profile, to maintain a liquidity buffer. ESRB also sets out tools for addressing risks stemming from the provision of credit to the economy, for example, when insurers originate mortgage loans or invest in corporate bonds. ESRB also believes that the provisions of Article 138 of Solvency II Directive (2009/138/EC) on the extension of the recovery period could be clarified with respect to the role of ESRB. The recovery and resolution framework, along with additional harmonization in the area of insurance guarantee schemes, would contribute to adequately protect policyholders as well as maintain financial stability in EU. ESRB also sees the need to adjust the risk-free interest rate term structure, particularly given the persistent low interest rate environment. ESRB explains that, based on the lessons learned from the pandemic, the Solvency II review should consider: 

    • Strengthening micro-prudential framework with a macro-prudential toolkit to ensure the provision of critical insurance services as well as the insurance functions that might have a significant impact on the financial system or the real economy
    • The need to build-up a buffer of capital ex-ante that provides additional resilience when needed
    • Granting, to supervisors, the power to block or suspend dividend payouts or equivalent activities when insurers are not breaching their solvency capital requirements
    • Measures to address volatility of the solvency ratio by, for example, increasing the cap for symmetric adjustment for equity risk in a symmetric way and by transforming the Volatility Adjustment (VA) into a symmetric VA that would form an additional own funds item to mitigate some of the credit spread volatility.
    • Enhancing the liquidity risk management requirements for insurers by establishing proportionate and systematic reporting requirements and granting supervisors the power to impose liquidity buffers for insurers with a vulnerable risk profile (in addition to the need to reinforce the risk management provisions of Solvency II on liquidity risks)

    In the Annex to the response letter, ESRB addresses the topics of long-termism and sustainability of insurers’ activities and priorities of the European framework, proportionality of the European framework and transparency toward the public, and improving trust and deepening the single market in insurance services. ESRB also emphasizes the need for requiring insurers to explicitly reflect climate change risks and cyber risks in their risk management practices and to adequately address the situation of negative interest rates in Solvency II.

     

    Related Link: Response Letter (PDF)

     

    Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, COVID-19, Reporting, Liquidity Risk, Solvency Capital Requirement, Climate Change Risk, ESG, EC, EIOPA

    Featured Experts
    Related Articles
    News

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News
    News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News
    News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News
    News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News
    News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News
    News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News
    News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News
    News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News
    News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8699