EU Commission must get Solvency 2 implementation right or risks stifling investment, insurers warn

Measures the new European Commission will set out for insurers in the second half of the year risk jeopardising policymakers’ efforts to boost Europe’s competitiveness and private funding capacity if not re-calibrated differently, the sector has warned. 

The industry lobby group Insurance Europe is piling up pressure on the incoming EU executive to loosen requirements on the sector – warning that several aspects of existing rules, as well as of proposed implementing measures, threaten insurers’ ability to contribute long-term investment to the bloc’s growth and energy transition goals. 

While the review of the insurance sector’s core prudential, operational, and reporting requirements (also called Solvency II) was wrapped up in December last year, the Commission and the EU insurance watchdog (EIOPA) are still due to set out implementing standards (also called “Level 2 legislation”) to define the exact calibration of formulas used to determine crucial aspects of the law.

These consist, first and foremost, of its capital requirements – buffers that firms need to set aside to hedge their investments. 

“The Solvency II review needs to be regarded in the context of the wider EU strategic agenda on bolstering European competitiveness, delivering on the green and digital transitions and supporting progress towards completing the Capital Markets Union,” the insurance association said in a position paper published last week. 

However, it warned, “the first draft […] proposals put forward to member states by the European Commission will not achieve the outcomes needed in all areas discussed”.  

“Alternative calibrations are required,” it added. 

Next six months key to determining Solvency 2 implementing rules

The updated Solvency 2 framework amends the treatment of insurers’ long-term exposures, also to strip out the effect of short-term volatility on these assets’ value and thereby prevent short-term re-allocations and excessive derivative investment – which would in turn heighten volatility and pro-cyclical effect (i.e. amplify ongoing market movements).   

It does so by setting out how to calculate the so-called “risk margin” – a buffer against insolvency risk – as well as the level of capital hedges mandated on equity positions, volatility adjustments, and the so-called risk-free rates of return.

However, the details of these calculations will only be established through a so-called Level 2 “delegated act” that the Commission will propose to co-legislators in the Parliament and the Council – who can only approve or reject the measures, without amending them.   

While the Commission is expected to put forward official proposals for Solvency 2’s implementing rules by the end of the year, Insurance Europe is arguing that proposals circulated so far would fail to guarantee that insurers do not have to re-adjust or curb their long-term exposures in order to meet the new rules – and would therefore fail to reach the objectives of the framework’s review. 

Overall, the group said that, while the high-level agreement negotiated between parliament and member states last year marked some positive progress, these Level 2 proposals risk reverting to the more conservative approach that would stifle investment. 

Angus Scorgie, head of prudential regulation at the association, said the risk margin, which the group says would currently reduce insurers’ available capital by €141 billion, “is excessive and unnecessary.” 

“When you consider that the current risk margin in Europe is up to three times greater than in the UK, twice as large as it is in Japan, and in the US there is no risk margin at all, current European calibrations are holding back capital that Europe’s economy desperately needs,” Scorgie warned. 

“The Solvency II review is a golden opportunity for the newly re-elected president of the European Commission to deliver on her promises to unlock capital and increase competitiveness in the EU,’’ he added. 

The group is pushing for tweaks that could “approximately halve the size and volatility of the risk margin” and hike “the industry’s risk-bearing capacity by up to €70 billion,” it said.  

EU leaders, finance ministers, and Commission President Ursula von der Leyen herself, have recently signalled they may look to amend a slate of existing financial sector rules – including capital rules on assets such as securitisation and SME investments – as a way to foster capital markets’ flow and boost available investment for the bloc.

[Edited by Zoran Radosavljevic] 

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