19 June 2013

Risk.net: LTGA proposals set to stoke divisions between insurers and lawmakers

The results of the long-term guarantees impact assessment are unlikely to end the division between the insurance industry and policy-makers over the amount capital insurers must hold against products with investment guarantees under Solvency II.

The proposals put forward by the European Insurance and Occupational Pensions Authority (EIOPA) last week are facing criticism that the conclusions are not supported by the data and that the proposals may not work in the way EIOPA intends. There are concerns that the recommendations will create further divisions between the parties negotiating the Omnibus II Directive and risk further delays to the implementation of Solvency II.

EIOPA's proposals include the scrapping of the counter-cyclical premium (CCP), replacing it with a new ‘volatility balancer', which aims to deal with the unintended consequences of volatility via a predictable adjustment to the relevant risk-free rate. While both the CCP and the volatility balancer aim to reduce the impact of short-term market volatility on insurers' own funds, EIOPA said in its report that the former had major drawbacks in terms of its effectiveness and the financial stability implications of its triggering mechanism.

EIOPA rejected the insurance industry's arguments for a more liberal matching adjustment, preferring the classical version with its onerous restrictions. The extended matching adjustment, it said, raised "significant concerns in terms of providing false risk management incentives". In addition, EIOPA also recommended that the convergence period for the extrapolated risk-free rate be increased from 10 years to 40 years for the euro.

EIOPA's strong recommendation of the classic matching adjustment may also make it difficult for European parties to reach an agreement, according to Nick Dexter, head of Solvency II for the UK at KMPG.

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