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Mr Bernardino, what is the reason of the further delay of Solvency II?
The main issue is to deal with long-term guarantee products. And the idea of this delay is to have an assessment offered, how the different tools that have been designed in order to deal with this long term guarantee products work. Measures like matching adjustment, countercyclical premiums need to be tested and they have never been tested in the past. But the exact timing for this testing is still under discussion. The Commission, the Parliament and the Council of the EU have to decide when this test will come and what the basis of this test is. After the test we will make conclusions and will provide our recommendations to the EU political institutions.
It's fundamental to have clarity and certainty – not only for supervisors but also for the industry. The worst situation is to have a kind of open situation without clarity and without a clear commitment to one date.
Wasn't it the strategy so far to start as soon as possible and then try to improve Solvency II while it is running?
This you have to ask the political institutions. Our view on Solvency II is that the system we use today is not sufficient because we need better and more information. Different types of risks are not reflected in the capital calculations right now. Therefore we definitely need Solvency II. We need Solvency II also because Solvency II is much more than capital. Solvency II is a new, completely different way of looking to risk management. Solvency II is a huge step in terms of transparency, too. All these elements are very much relevant for the insurance business for protection of the policyholders.
A second thing is the political timing. Especially for these long term products in the life insurance sector there are some challenges in terms of applying an economic evaluation because of the volatility right now. EIOPA’s message: we need Solvency II to be implemented. But we also need to bring clarity and certainty to the process.
Insurance companies would agree that clarity to the process is needed. But what they need much more are other stress factors for the asset classes!
Have a look at the development of Solvency II, which is a risk based system: The basis is to look at the business risks of insurance companies and one of the most important risks is related to their investments. Then there needs to be a decision on the level of prudence that you want to have into the system. And that’s of course a political decision. The political institutions in Europe are quite clear in the Directive of 2009 saying “we want companies to have capital requirements in order to reduce the number of failures to probability of 99.5 per cent”. Again it was not the supervisors decision, it was a political decision for this level of prudence. Then the supervisors made an analysis of risks based on the available data . Taking for example the volatility of equity markets in calculation we got 39 per cent.
But what you have to understand by this capital calculation: it is not only about the risk charges on each category of investments. You have to consider the correlations, too. Taking into account the correlations, the equity risk can come down to around 15 per cent!
I think the impacts of diversification is very important but little known.
Yes. If you look at the formula, insurers are not bound to have a capital which is a sum of all the risk charges. The formula takes into account the correlation. So if you have a well-diversified portfolio then your numbers are coming down! I think this is a good incentive. And we should further incentivise companies to have a good diversified portfolio.
But isn't there the threat that everyone is discovering the same Solvency-II-efficient asset allocation and so systemic risk is emerging?
No. In countries which have already implemented a risk based regulation there is no herd behaviour in terms of asset allocation. There will be some optimal asset allocations. But risk appetites will continue to be different. There will be companies which have for example good management skills on real estate and so will have here a higher allocation. The investment policies are not only driven by regulatory requirements. On the contrary, we are going in comparison to Solvency I in a completely different direction. The portfolios will evolve much more because of the reality of the economy or because of the rates of guarantee contracts.
A main point of the sceptic is that Solvency II doesn't fit in the low interest world of today. The stress factors are too high in comparison to the yields.
The stress factors are a reflection of the situation of the economic cycle and the stress factors are not constant. Constant is only the 99.5 per cent confidence level. The risk factors are not set in stone. There will be a review of the risk factors. The risk charges will be recalibrated as time goes by. Most of the risk factors take into account the evolution in the markets.
Let's be frank: Solvency II is not perfect. There are no perfect regulatory systems. Regulatory systems are based on reference points. You have to understand that the system is built upon a European average. So it cannot reflect exactly the risks of typical German insurer. But the “beauty” of Solvency II is that we have besides the standard formula the possibility to use partial models or internal models. These models bring capital calculations closer to the risk and I am sure these models will grow in the future.
How does EIOPA take the low interest environment for life insurers into account before it is too late?
It is in our responsibility to think in advance of what could come. The best way to deal with risks is to try to measure them and to be preventive. We want at least to see what are the different ways of dealing with this. We have performed a stress test on major insurance players in Europe with a focus on low yield scenarios. This test is public. We are now entering into the second stage of this analysis where we are talking to the different supervisors in Europe and look what kind of activities have been performed. Then we will concentrate on those cases where the analysis has to go deeper. There are various possibilities to deal with this. Important is that companies recognise this situation and change their products and their investments. But again the same lesson: it is better to start now to deal with that.