16 May 2014

Risk.net: EIOPA chairman says stress tests 'preventative' not a 'repair tool'

Insurance regulators have often been criticised for simply copying the approach of their banking counterparts. Gabriel Bernardino, the chair of the European Insurance and Occupational Pensions Authority (EIOPA), insists this is not the case for European-wide industry stress tests running in parallel with a current health-check of the banking system.

Insurers that fail the exercise should not fear an increase in capital requirements. This does not mean there will be no consequences. The vulnerabilities exposed during the test will be discussed in colleges of supervisors and firms might be asked to address any problems through Pillar II. "Capital is not the answer to everything, especially in insurance", Bernardino concluded.

This interview took place a week after Eiopa unveiled the nature and the size of the shocks insurers will be subject to in the stress tests. This will be the first time such an exercise is conducted based on a Solvency II balance sheet. It follows last year’s trilogue agreement on the long-term guarantees package, which cleared the way for the Omnibus II directive.

In the past the chairman of Eiopa has warned politicians against weakening the calibrations of Solvency II to facilitate political agreement. While he stands behind the authority’s more conservative recommendations, Bernardino here acknowledges the need for compromise, pointing the way forward.

A working group to set the method for extrapolating the long end of the Solvency II discount curve was formed in recent weeks, he announces. This comes after criticism of the Smith-Wilson method (which does not take market data into account after the last liquid point). The working group will deliver its findings before the end of the year. Eiopa is also working to gather data that could support a review of the charges imposed on investments in infrastructure, a theme life insurers cherish dearly.

Work to create global capital standards is also high on the authority’s long-term agenda. Revisiting Solvency II rules at some point in the future is a price worth paying to clear the way to increase consistency and comparability of capital standards at global level, says Bernardino. But it is still too early to discuss the details. A more clearly stated priority is the revision of Eiopa’s remit. The hope is that policy-makers will nudge the balance of power between the European authority and national regulators towards the former.

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