11 December 2018

Insurance Europe: 2018 Solvency II review: EC proposal lacks serious ambition to unlock investment the economy needs

Insurance Europe has raised serious concerns in its response to a consultation by the European Commission on its draft proposals for the 2018 review of the Solvency II Delegated Regulation.

While the industry welcomes the Commission’s aim of simplifying Solvency II and increasing proportionality in its application, the proposals lack ambition in several important areas. Unless the final text is improved, the Commission will miss a key opportunity to remove barriers to long-term investment and to unlock insurers’ capacity to support the growth that Europe’s economy so desperately needs.

The Commission’s proposals for the recalibration of long-term equity and the review of the risk margin – both of which have a significant impact on insurers’ capacity for long-term investments and to support the objectives of the Commission’s Capital Markets Union project – must be more ambitious. While acknowledging the Commission’s recognition that action is needed on long-term equity investments, Insurance Europe warned that the Commission’s technical proposal will not work in practice. It is therefore calling for swift action by the Commission to amend its proposal so that it has the intended impact.

Regarding the risk margin, it should first be noted that this is a conceptual element of Solvency II that, according to the European Insurance and Occupational Pensions Authority, accounts for €200 billion of insurers’ capital and is over and above the amount needed to pay customer claims. There is significant evidence that the 6% cost of capital, a key element of its calibration, is too high. This impacts, in particular, long-term products and investment. If the Commission continues to ignore this evidence and preserve the status quo, it will miss a key opportunity to reduce the current barriers to long-term investment by insurers. While a more complete review of its purpose and design can take place in the 2020 review, a first step is needed and justified now.

Insurance Europe also said the review provides the opportunity to take a first step in improving the design of the volatility adjustment, by refining the trigger mechanism for the application of the country adjustment.

It also raised other concerns, including the need to avoid unnecessary limits on the calculation of loss absorbing capacity of deferred tax (LAC DT), which can be found in its response to the consultation.

Full response

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