“Mitigating the likelihood and the impact of a systemic crisis in insurance will be an important policy objective,” Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (Eiopa), reportedly told an insurance conference.
Insurers’ business models have been hit hard in recent years by record low global interest rates eating into the margins between what insurers earn from investments and pay out to policyholders.
Coming into effect earlier this year, Solvency II sets out the level of capital insurers must hold in order to do business in the EU. The effectiveness of the rule is to be re-examined every five years.
Bernardino told Reuters that Eiopa plans to use the 2021 review to “integrate in Solvency II a macro-prudential framework for insurance”, aimed at looking at insurers’ funding models.
He explained that the macro-prudential operational objectives could include ensuring sufficient loss-absorption capacity and reserving, avoiding negative interconnections and excessive concentrations as well as avoiding excessive involvement in activities posing systemic risk.
Other measures could include limiting pro-cyclicality and risk behaviour as insurers collectively search for yield and avoiding moral hazard.
Recalculating UFR
The news comes as last month, Eiopa said it was considering whether to slash the benchmark used by insurers to calculate the value of billions of euros of liabilities – a move that would push up the cost of life insurance.
The regulator said it would reduce the “ultimate forward rate” or UFR, an interest rate of 4.2% that is used for discounting liabilities over a 20-year period, to 3.7% to better reflect the European Central Bank’s (ECB) ultra-low interest rate.
As a result, insurers will be forced to hold more capital, driving up the price of life insurance.
Solvency II criticism
Insurers have long-complained that Solvency II will make it harder for them to do business, demonstrated by a spate of consolidation within the industry.
In September, Ned Cazelet, chief executive of Cazalet Consulting, which provides strategic advice, market intelligence and support to financial institutions, told International Adviser accused some insurers of using the “transitional relief” clause in the legislation to hide “deep trouble” in their balance sheets.
The exemption gives companies 16 years to comply with Solvency II rules.
“The rules took years to be formulated. If it was so urgent, why did it take 10 or 15 years to bring it in? Also, now the rules have been brought in, you can ask for transitional relief.
“Some UK companies are making selective use of transitional relief but Germany is in particular. Parts of the French and Italian insurance industries would also be in deep trouble,” said Cazalet.
