13 September 2013

EIOPA/Montalvo & Bernardino: Contributions to the Eurofi newsletter

Carlos Montalvo Rebuelta - Solvency II, better today than tomorrow

Today, insurers are putting high on their risk agenda the regulatory uncertainty that the delay of Solvency II has created. A further delay, therefore, is no longer an option, both because risk based supervision is needed but also because in case of further delays national supervisors might feel the need to introduce individual changes, resulting in a fragmentation of rules that conflicts the idea that the business is a global one and demands a common approach.

The main focus of current discussions is the appropriate treatment of short-term market movements for long-term insurance business. EIOPA has conducted a technical assessment (LTGA), collecting both qualitative and quantitative information on the effects of selected regulatory measures. As a result, EIOPA concluded that the mechanisms to be included in the Solvency II framework should fulfil a number of principles in order to ensure a high degree of policyholder protection, as well as effective supervisory process: Alignment with the Solvency II framework and the economic balance sheet concept; Full consistency and comparability in order to enhance the single market; Efficient linking of all the three pillars (quantitative basis, qualitative requirements and enhanced reporting and disclosure);Proportionality and simplicity; Adequate treatment of transitional issues.

Based on the assessment and the outlined principles, EIOPA supports the inclusion of some of the measures tested. EIOPA further recommends that the impact of the application of the measures on the solvency position of individual undertakings should be publicly disclosed as part of the normal disclosure process. If the Insurance sector has a good story to share following the Crisis, it shouldn’t shy from doing so.

The EU political institutions have to make an informed decision on the long-term guarantee measures and EIOPA advice provides a sound and reliable basis to build upon, which is good news for all parties involved.

Full article

Carlos Montalvo Rebuelta - Insurance and infrastructure investments: a happy marriage?

Infrastructure investments are generally long-term. The revenues of infrastructure projects can be less volatile as they provide in many cases essential services, have high barriers to entry or benefit from some kind of guarantee by a governmental body. They are also sometimes linked to inflation.

The long term nature of their liabilities allows insurers to have a longer time horizon than many other institutional investors. Many retirement products promise fixed payments. It is therefore natural to look to insurers as a potential source of infrastructure financing. They could in turn benefit by diversifying their holdings and earning illiquidity premia.

Regulators cannot be oblivious of the economic challenges Europe is facing. But the main purpose of regulatory requirements is to protect policyholders. Regulatory capital provides a margin of safety. Any specific treatment of infrastructure investments must therefore be based on reliable evidence for a different risk profile. EIOPA has been analysing this topic for some time and will provide its final results in a report to the European Commission this autumn.

In the discussion about potential changes important elements of the already existing framework are sometimes forgotten: Solvency II allows insurers a large degree of flexibility in investing. Moreover, studies analysing the effect of Solvency II on investment behaviour often disregard the increase in the capital charge resulting from any mismatch between assets and liabilities.

As a result, Solvency II provides incentives to invest in long-term debt infrastructure debt (e.g. Europe 2020 Project Bonds).

Taking long term assets and long term liabilities; how should Solvency II deal with this “perfect match”? The response is simple: Solvency II should be risk neutral, meaning same risk same capital charge, not pushing insurers artificially to invest in given assets. There is evidence in today’s investing decisions by insurers that a neutral framework allows for investing in infrastructures, and that a risk based one encourages sound ALM and diversification, thus rewarding investing in long term assets.

Full article

Gabriel Bernardino - Thoughts on the potential of insurers as a source for SME financing

The availability of financing for SMEs is a crucial factor for economic growth. They represent more than 98 per cent of all enterprises in the EU and account for roughly 67 per cent of total employment. At the same time investors might be exposed to higher risks as SMEs benefit less from diversification and are generally more likely to experience difficulties in obtaining funds.

A crucial element of a regulatory framework is the capital requirements. EIOPA is aware of the effect that the regulatory risk charges for SME financing may have on the willingness of insurers to invest. However, the risk charges have to reflect the actual risk to ensure that policyholders are properly protected. EIOPA is currently reviewing the calibration. Any recommendation for a change has to be based on sufficient and reliable evidence...

Regulatory requirements are not the only driver of investment behaviour. Insurers have to surmount a number of non-regulatory obstacles before providing SME financing.

The area of SME financing has so far been dominated by banks. Banks often build a long-term relationship with SMEs and acquire detailed knowledge over time. Insurers may therefore lack the necessary information to provide loans directly.

A key competency of banks is the active management of credit risks. Insurers have traditionally not assumed such an active role. As a result insurers will probably invest alongside banks. A potentially promising measure for increasing the willingness of insurers to provide SME financing might therefore be guarantees provided by public institutions on SME loan portfolios or SME loan securitisations. This allows for a better match with the liabilities of insurers.

Full article

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