While Europe’s insurers welcome the inception impact assessment and agree to a significant extent with its objectives and policy options, there are some key omissions and refinements that are necessary to address the flaws in Solvency II and to ensure the right outcomes.
On the Commission’s potential objectives and policy options:
Insurance Europe supports the Commission’s objective of facilitating insurers’ ability to continue to offer long-term life and pension products with guarantees, and to enable them to continue to contribute towards the long-term financing of the economy. However, while mitigating artificial volatility is key, two other elements should be added:
Ensuring insurers’ liabilities are not exaggerated, especially long-term liabilities.
Ensuring capital requirements for investments are appropriate.
Moreover, it should be made clearer that policy options which result in a justified and needed reduction in overall capital requirements will be considered by the Commission.
Insurance Europe supports the Commission’s objective of expanding and improving the application of proportionality in Solvency II.
Insurance Europe also supports the Commission’s objective of achieving a level playing field and strong policyholder protection across Europe. However, there is no need to harmonise insurance guarantee schemes as Solvency II, when implemented appropriately, already offers very high and sufficient levels of protection. The focus should be on ensuring Solvency II is applied appropriately across all member states and on supervisory coordination of cross border activity.
Given that systemic risk is limited for the insurance sector – and that Solvency II is already very comprehensive – any new measures should be limited to the application of the IAIS holistic framework, avoid procyclicality and should not go beyond the Commission’s call for advice.
Europe’s insurers do not support non risk-based reductions in capital requirements as incentives to address climate change. Addressing the measurement flaws and other barriers in Solvency II will create strong enough incentives when combined with insurers’ own natural interest and business model, together with the Commission’s powerful regulatory initiatives (eg the Sustainable Finance Disclosure Regulation, Taxonomy and the Non-Financial Reporting Directive) and the wider EU Green Deal.
Europe’s insurers take the view that two additional objectives should be added:
• Ensuring the international competitiveness of the European insurance industry – Other jurisdictions appear to take account of the special characteristics of insurers’ long-term business model, as well as their economic and social goals, to a greater extent in the design and calibration of their regulatory frameworks. This is something that should be reflected in the review of the framework.
• Simplifying and streamlining Solvency II reporting requirements – This should be done in line with the Commission’s fitness check of supervisory reporting requirements.
On economic and social impact:
The Commission indicates that the strong capitalisation of the industry means that increasing capital requirements would not have an adverse impact. This is wrong because, even if it appears an insurer can “afford” a capital increase, higher capital requirements for interest rate risk shocks can, for example, have a significant negative impact on insurers’ ability to offer products with long-term guarantees and push them to shift risk to policyholders.
On impact assessment:
It is vital to fully understand and measure the cumulative effect of policy options (including both capital and operational costs) at member state and EU level, in both normal and stressed market conditions.
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