23 March 2016

EIOPA macroprudential approach to the low interest rate environment in Solvency II

The aim of this publication is to contribute to the discussion on the possible need to develop a macroprudential framework in the insurance sector to promote financial stability in a Solvency II environment.

The following three objectives to be targeted by supervisory authorities in the current low interest rate environment are addressed:

• Increasing the resilience of the insurance sector.
• Limiting risky behaviour of insurers collectively 'searching for yield'.
• Avoiding procyclicality (i.e. fluctuation in line with the trend in the economic cycle).

For each of these three objectives European Insurance and Occupational Pensions Authority (EIOPA) defines a set of instruments that are either part of or compatible with Solvency II.

To address the first objective, the following could be considered:

• the  possibility  of  increasing capital  requirements  or  cancelling  or  deferring  dividends;
• the need  to  have higher loss absorption (HLA) capacity for Global Systemically Important Insurers (G-SIIs);
• the possibility of requesting a reduction in the maximum guarantees offered in new contracts;
• the need  to  strengthen  the recovery  and  resolution (R&R) framework. 

Regarding the second objective – limiting risky   behaviour   as   insurers   collectively “search for yield” – the implementation   of   the   Solvency   II   requirements   could   limit such risky behaviours. Due  to the  fact  that  Solvency  II  is  a  risk  sensitive  framework, increased  riskiness  of  an  investment  portfolio should generally  lead  to  higher capital  requirements.

Lastly, on  the  need  to  avoid  procyclicality,  the paper touches  upon  the  series  of  measures  such  as  the  volatility  adjustment,  the matching  adjustment  or  the  extension  of  recovery  period  that  were  designed, among other things, to address the issue  of procyclicality.

Furthermore, short- and medium-term actions that EIOPA and national supervisors can undertake in order to address the low interest rate environment are described.

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