Thursday, 25 January 2018

Solvency II review: EIOPA draft advice must focus far more on areas mandated by EC


Insurance Europe has published its response to the European Insurance and Occupational Pensions Authority (EIOPA) draft advice to the European Commission on its 2018 review of Solvency II.
In its extensive response, Insurance Europe raised concerns about EIOPA’s unjustified focus and effort on areas that were not mandated by the Commission — such as interest rate risk and proposals on the Loss Absorbing Capacity of Deferred Taxes (LAC DT). It also asked EIOPA to further consider whether its proposals make economic sense (eg, risk margin) and what the cumulative impact of all of its proposals would be.

Insurance Europe said EIOPA should avoid an overly theoretical approach and should not ignore the real economic meaning and implications of its advice. For example, EIOPA reported that the current risk margin calibration and methodology leads to an aggregate risk margin of €210bn for the industry and about 45% of the total life insurance industry capital requirements. While the industry has already argued that this level is extremely excessive and provided technical evidence to justify its review, EIOPA envisages no changes.

Unfortunately, EIOPA does not seem to have even considered if the current levels of the risk margin are reasonable or even possible, and in line with the intended purpose of the risk margin concept. Such an analysis on whether the current risk margin is appropriate should be provided to the Commission, which is interested in whether the current methods and assumptions of Solvency II work as intended.

Insurance Europe also reiterated its strong concerns on EIOPA’s decision to work, on its own initiative and without a mandate from the Commission, on reviewing the calibration for interest rate risk.

This issue is very closely related to the risk-free rate and the valuation approach, which were the subject of significant debate and controversy during the development of Solvency II and will be a key focus for the Solvency II 2020 review. It is therefore inappropriate to review the interest rate issue now, in isolation. In fact, Insurance Europe believes that the Commission did not include it in its call for advice for good reasons. All changes relating to interest rates should be considered together, and as part of the 2020 review.

Similarly, Insurance Europe raised concerns on suggestions in the draft advice that “convergence” means all supervisors applying the most prudent and restrictive approach, irrespective of local market characteristics, conditions and risks.

This is a particular danger for LAC DT, where EIOPA appears to favour simplistic and arbitrary limits on all insurance companies across markets, instead of encouraging appropriate supervisory judgement and dialogue. Such an approach defeats the risk-based nature of the framework and risks making the framework significantly more conservative than it already is.

The industry further believes that EIOPA should provide in its advice an overall impact assessment of its proposals, as opposed to a solo assessment per area of review. Assessing the various proposals on an isolated/individual level cannot represent a reliable basis for assessing if and how the overall impact would support the objectives of Solvency II, as well as the balance between simplicity and risk-sensitivity, the overall burden and costs on the industry. All these elements of impact were in fact requested by the Commission in its call for advice.

Moreover, the industry believes that the current EIOPA proposals would have implications for Europe’s long-term growth and the Commission should be appropriately informed and advised by EIOPA in such areas.

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