02 October 2013

Risk.net: Lithuanian presidency proposes increase to volatility adjuster cap

Speaking at Insurance Risk Europe, Jorg Sauren, internal model owner at ING Insurance Eurasia, said that the Lithuanian Presidency of the Council of the European Union has put forward a plan to set the cap at 65 per cent as part of its proposals on Omnibus II. Discussions during the Omnibus II trilogue negotiations between the European Parliament, European Commission and council were now focusing on a cap of between 50 per cent and 70 per cent, he said.

This is a major shift from the proposed 20 per cent cap – the level of benefit that an insurer can derive from the volatility adjuster – proposed by the European Insurance and Occupational Pensions Authority (EIOPA) in its long-term guarantees report published in June.

Sauren said there is growing optimism that an agreement will be reached before the end of the year, which could mean that Solvency II might come into force in 2016. In addition to making some concessions on the calibration of the volatility adjustment, the negotiations are moving towards a more generous design of the mechanism, Sauren said. The volatility adjuster was originally intended to be an adjustment to own funds, but it could now have a broader effect on firms' balance sheets.

The negotiations were also moving towards a less constrained matching adjustment, Sauren said, with the discussions focusing on the floor of the fundamental spread and the ring-fencing requirements. In addition, discussions around the method and length of extrapolation were giving way to a debate on transitional measures.

Commenting on the implications of the measures for insurers' investment strategies, Sauren said that the volatility adjustment is likely to reduce the bias towards holding bonds of the country in which an insurer with foreign liabilities is domiciled. This, he said, is because the benefit of the volatility adjuster is calculated based on an average portfolio of European assets. A bias towards ‘home-country' assets would increase balance sheet volatility.

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