Valdis Dombrovskis of EC Speaks on Reviews of Solvency II

The EC Vice President discussed the importance of the insurance sector for the Capital Markets Union. In 2016 and 2017, the risk calibrations for infrastructure investments by insurers were adapted. Additionally, the revised risk calibrations for simple, transparent, and standardized securitizations in Solvency II will help insurers take part in the rejuvenation of securitization markets in Europe. He also mentioned that the EU member states reached a common position on the proposal for a Pan-European Personal Pensions Product (PEPP), which marks an important milestone in building the Capital Markets Union. Another important Capital Markets Union priority is sustainable finance. Rules are being established about disclosure and public information, which financial institutions (including insurers and insurance distributors) must give on their policies and practices in this area. The next step will be to propose the required changes to the Delegated Act on Insurance Distribution Directive. He stated, "....sustainable finance actions have just begun and we are looking at additional elements that relate to Solvency II."

While discussing the review of Solvency II, Mr. Dombrovskis mentioned the three themes of this year’s review of the delegated act, which involve improving proportionality in the way insurers calculate capital requirements, the removal of unintended technical inconsistencies, and  the removal of unintended barriers to investments in unlisted equity and privately placed debt. The work for the review is based on extensive input from EIOPA, which presented a thorough analysis of nearly 25 items. The EIOPA advice is being carefully analyzed, along with the impact assessment and the positions of stakeholders. A preliminary positive view has been taken on many of the items in the EIOPA advice. He stated, "On the risk margin, EIOPA's advice shows that the current level of the cost of capital is broadly appropriate. We will however take a hard look at the broader design of the risk margin in the context of the review of the Directive in 2020." Stakeholders criticized the own initiative advice of EIOPA, particularly stressing that the proposal on interest rate risk is controversial. It may be preferable to revisit this issue as part of the 2020 review. In this year's review of the Solvency II Delegated Regulation, more unlisted equity and unrated debt will be allowed to benefit from lower calibrations, based on robust qualification criteria. EC will continue the work on listed equity.

As Solvency II is a risk-based system, to lower the calibration, evidence will be needed that the risk level of investments in listed equity is lower than that the current one. "According to the EC's Better Regulation principles, we need an impact assessment for important legislative changes. We have seen claims that listed equities are typically held for a very long-term, but we need concrete evidence for that. That is why we have launched a study of the drivers of insurers' investments in equity, and the results should be available later this year," added the EC Vice President. He then discussed the 2020 review of the Directive. This was supposed to focus on the long-term guarantee measures, but it will be reviewed more broadly. That is why preparatory work is in hand and EIOPA is busy collecting data. The evidence and the advice will be carefully considered, along with all ideas presented to EC. He concluded that Solvency II has several important and interacting goals and it should maintain financial stability and protect consumers while allowing the insurance sector to invest and contribute to growth.

Related Link: Speech

Keywords: Europe, EU, Insurance, Solvency II, Reinsurance, Capital Markets Union, Proportionality, EIOPA, EC