Need for a better balance - The Solvency II review and lessons from EIOPA's impact assessment - GDV
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Gesamtverband der Deutschen Versicherungswirtschaft e. V.
Regulation and supervision compact
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Need for a better balance
The Solvency II review and lessons
from EIOPA’s impact assessment
While the current 2020 Solvency II review is ongoing, the Götz Treber
Member of the Extended
German insurance industry has proven its stability throughout Management Board
>.* ŤǨDz 9%7)*6/'Ş ./= ?7)*;4/7*=>.* *++*'>/@*7*== 8+ ǧǫǧǪǧǪǧʆǭǬǯǧ
g.treber@gdv.de
the current Solvency II regulatory framework. However, EIOPA’s
Lenka De Mauro
holistic impact assessment shows that the draft proposals still
Head of European and
have room for improvement in some areas, particularly with International Affairs
ǧǫǧǪǧǪǧʆǭǨǭǨ
regard to three key aspects: l.demauro@gdv.de
ʻ .*extrapolation method used for the risk-free rate curve should not
be changed.
ʻ .**++*'>/@*7*==8+>.*Volatility Adjustment should be increased,
and the Dynamic Volatility Adjustment should be included in the
standard model.
ʻ .*9;898=*)'%4/&;%>/878+>.*interest rate risk should be improved.
Addressing these topics in a consistent manner will enable and
promote the achievement of other important EU political objec-
tives such as the Capital Markets Union, the European Green
*%4%7)>.**'8786/';*'8@*;C%+>*; ŤǨDzŞ
02 Need for a better balance
Solvency II review: listic Impact Assessment5 (HIA) to This publication gives an over-
ongoing situation gain deeper insights into the effects view over the HIA’s findings so far.
The goal of the 2020 Solvency II re- of the review by analysing the com- The results reveal that many of the
view1 is to better reflect the long-term bined impact of changes to techni- proposals currently under discussi-
nature of the insurance business mo- cal provisions, own funds and sol- on would have a direct impact on
del, thereby strengthening the status vency capital requirements. The re- insurers’ capital requirements.
of insurers as long-term capital pro- ference date for the exercise was the
viders. Achieving this will allow insu- 31 December 2019. Need for a better balance
rers to contribute to key European – results of the Holistic
objectives such as the Capital Mar- COVID-19 changed not Impact Assessment
kets Union2 (CMU) and the Europe- only the timetable The 2020 Solvency II review is an
an Green Deal at their full potential. Due to COVID-19 the timeline of the opportunity to improve the current
The starting point of the review review has been delayed by 6 months regulation and ensure that it re-
was the European Commission‘s (see Chart 1). EIOPA has postponed the flects the business model of insu-
„Call for Advice3„ to the European submission of its recommendations rers more accurately. Due to their
Insurance and Occupational Pen- to the European Commission until liability structure, insurers are able
sions Authority (EIOPA) on 11 Feb- the end of December 2020. The ori- to hold investments until maturity.
ruary 2019 (Directive 2009/138/EC). ginal deadline of 30 June 2020 could As long-term investors, insurers can
On 15 October 2019, the EIOPA not be met, as EIOPA also wanted to thus provide financing to the Euro-
published a consultation paper4 on assess the impact of the pandemic pean economy and exert a stabili-
the review of the Solvency II Direc- on the financial markets and the in- sing and anti-cyclical effect on fi-
tive. This paper made draft recom- surance business. nancial markets. This, in turn, en-
mendations for a possible adaptation Thus, the next stage of the re- ables insurers to make a significant
of the Solvency II Directive and the view includes an update of EIO- contribution to the Capital Markets
Delegated Regulation. EIOPA will de- PA’s Holistic Impact Assessment6 Union, Sustainable Finance and the
liver its advice to the European Com- to determine the consequences of economic recovery.
mission at end December 2020. COVID-19. In order to carry out this However, the HIA reveals that
As part of this process, early impact assessment, EIOPA has sent this opportunity might not be ta-
this year, EIOPA carried out a Ho- a complementary request for infor- ken; instead, EIOPA is discussing
mation to the industry with the re- tighter rules with far-reaching con-
ference date of 30 June 2020. sequences going against the ob-
Ȃ 2020 Solvency II review jectives of the current review pro-
Ȅ EU Capital Markets Union ȇ Information on the holistic impact cess. The impact assessment shows
ȅ Request to EIOPA for technical advice on assessment of the review
that the insurance market would be
the review of the Solvency II Directive Ȉ Complementary information request
Ȇ Consultation on technical advice for the on the holistic impact assessment of the strongly affected by these changes.
2020 review of Solvency II Solvency II review
*=9/>*>.*)*4%C>.*>/6*4/7*;*6%/7=>/-.>
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ǪǧǨDz ǪǧǪǧ ǪǧǪǨ
June: Final EIOPA-
End of Impact Advice to EC
Assessment EC-Advice
Oct:
July: End of EC-Consultation
- Start of Complementary
Update Impact Assessment Sep:
End of Complementary
- Start of EC-Consultation Impact Assessment
8?;'*Š *;6%77=?;%7'*==8'/%>/87
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Need for a better balance 03
What have we learnt %4%7'*/7)%7-*;
from the HIA? .%;>ȄƊ 84@*7'C*@/*AȄȁȄȁ
The HIA reveals both lights and
shadows in the current EIOPA draft ȂŞ B>;%984%>/87
proposals. The results show that ȂŞ /=36%;-/7 /-.>*7/7-= ȄŞ Šǝ /-.>*7/7-/7
the current markt
while some of the discussed changes ȄŞ Šǝ6*7)6*7>%> Rewiew 2020 situation
ȅȂŞȂȄŞȄȁȂȌ Amendments
would be improvements (risk mar- Review 2020
;%7=/>/87 ȅŞ 7>*;*=>;%>*;/=3
ȅŞ 7>*;*=>;%>*=ť
gin, for instance), there are a num- spread correlation
UFR Reduction
ber of other changes that would have ȆŞ 87-Ť>*;6*:?/>C
negative consequences. ;%7=/>/87%4=
Removal
• Especially worrying for the in-
ŤǨDz
surance market are the results re-
garding the extrapolation of the
interest rate curve. German in- 8?;'*Š *;6%77=?;%7'*==8'/%>/87
surers would be strongly affected
by a deferral of the starting point financial markets are low and lo- to this effect. According to EIOPA’s
of the extrapolation or a change of wer values of the VA when spreads corridor method the UFR will con-
the extrapolation method. The cur- are high. Since the VA is designed tinue to decrease in the coming ye-
ve used to discount the provisions to mitigate the effects of short- ars. As a consequence of that, the
of insurers is based on available term spread widenings we consi- long-term liabilities will be parti-
swap data. Since reliable swap data der this a negative outcome. cularly affected.
is not available for long-term matu- The chart above provides an over- • The removal of the transitional
rities, an extrapolation of interest view of the impact of the EIOPA measures from Solvency I to Sol-
rates is necessary. This leads to sta- draft proposals on the Solvency II vency II. The current transitional
ble and reliable long-term interest Regulation. measures will be phased out line-
rates. In the HIA, EIOPA applied a arly until 2031.
new extrapolation method that ta- Challenges today
kes non-reliable swap data into ac- Even without these amendments, In addition, the effects of the CO-
count and would lead to a signifi- German insurers currently face a VID-19 crisis on insurance compa-
cantly lower risk free rate curve. number of challenges stemming nies remain a challenge for the in-
This would make companies‘ ca- from regulation that have an im- surance industry. German insurers
pital resources much more su- pact on their solvency position (see are meeting their obligations despi-
sceptible to fluctuation, which Chart 3), for example: te the challenges resulting from the
would result in undue pressure on • The IBOR transition: The instru- COVID-19 pandemic.
insurers to act in a procyclical way, ments from which the Solvency II
thereby creating barriers to long- interest rate curve is derived will
term investments by insurers. change in the next years. This is
• Another area of concern is the necessary because they currently
treatment of the interest rate rely on IBOR reference rates who- %7C%=9*'>=/69%'>9;*=*7>4C
risk: Negative interest rates are se significance as reference ra- >.*=84@*7'C98=/>/878+/7=?;*;=
currently not further stressed. tes is decreasing. However, these .%;>ȅƊ?;;*7> 84@*7'C=/>?%>/87
The changes in the HIA seem to be new instruments will lead to a lo-
justified taking into account cur- wer interest rate curve. Thus, this ;%7=/>/87
rent market conditions. However, purely technical transition which
we believe that technical changes is not connected to any change in UFR Reduction
need to be adopted to mitigate the the economic situation will presu- ;%7=/>/87%4=
negative effects. mably increase liabilities, especial- Removal
• Volatility Adjustment (VA): EI- ly for long-term business. ŤǨDz
OPA applied several changes to • Ultimate Forward Rate (UFR):
the VA with contradictory effects. Insurers discount their liabilities.
All in all, this will result in higher Since there is no long-term mar-
values of the VA when spreads on ket data available, the UFR is used 8?;'*Š *;6%77=?;%7'*==8'/%>/87
* - ? 4 % > / 8 7 % 7 ) = ? 9 * ; @ / = / 8 7 ' 8 6 9 % ' > ǝ Ɗ ǝ 8 Ş Ǫ ǫ ǝ Ɗ ǝ * 9 > * 6 & * ; Ǫ ǧ Ǫ ǧ04 Need for a better balance
What should be done – Interest rate risk: view presents a unique opportunity
and what shouldn’t We think that the risk factors EIOPA to review the Solvency II regulatory
German insurers have strongly ad- tested in the HIA are reasonable for framework in a way which facilita-
vocated for a moderate further de- the liquid part of the curve. However, tes the achievement of these overar-
velopment of Solvency II, parti- the illiquid part of the curve needs to ching objectives at the European le-
cularly with regards to long-term be derived from the stressed liquid vel while at the same time ensuring
guarantees. part exactly with the usual extrapo- policyholder protection. This view
Against this background, the lation method. Only this procedure is shared by the Report on the
current EIOPA draft proposals are a represents the changes in the inte- Capital Markets Union (CMU) by
promising development. However, rest rate curve which could occur in the High-Level-Forum: The review
the overall package still represents a real terms. should “better consider the long-
tightening of requirements, especi- term nature of the insurance busi-
ally when interest rates are low. Risk margin: ness” and “avoid exaggerating valua-
The level of the cost-of-capital rate tion of projected long-term liabilities
Extrapolation of the of 6% which is a key parameter in and reduce artificial volatility.”7
risk-free rate curve: the calculation of the risk margin However, even at this early
Starting the euro extrapolation no is inappropriately high and should stage of the review, it must be no-
later than 20 years when using the be lowered significantly. ted that many of EIOPA’s draft pro-
current method is appropriate. Ho- We welcome that EIOPA pro- posals would counteract the EU‘s
wever, there is no need to change the posed a slight change in the design objectives.
existing extrapolation method. of the risk margin by introducing a
An extrapolation start at 15 years new parameter. As a result, the risk
ȉ A new vision for Europe’s capital markets
should be considered. margin for long-term liabilities will ť /7%4;*98;>8+>.*/-.*@*4 8;?687
be less volatile. However, we think >.*%9/>%4%;3*>= 7/87ş?7*ǪǧǪǧş9ŞǬǨ
Volatility Adjustment (VA): that the choice of this new parame-
The industry strongly supports focu- ter could be changed to improve this
sed improvements of the VA: effect.
• increasing the general level of the
VA to properly reflect the ability What is at stake?
of insurers to earn returns above The review process is linked to other
risk-free rates, key initiatives at the EU level. An
• applying it to all maturities, and adequate review of the regulatory
• avoiding artificial balance sheet framework is essential to achieve
volatility. the objectives of political priorities
such as the Capital Markets Uni-
Dynamic Volatility on or the European Green Deal
Adjustment (DVA): whose importance has increased
Applying a DVA in the standard for- in light of the economic impact of
mula, too, would be appropriate. the corona crisis. In our view, the re-
Imprint
Publisher Person responsible Author
Gesamtverband der Deutschen Versicherungswirtschaft e. V. Ĭ>D ;*&*; Dr. Victor Cristobal
/4.*46=>;%Ŝ*ǬǫŶǬǫ şǨǧǨǨǯ*;4/7 Member of the Extended Management Board Cover photo credits
8=>+%'.ǧDZǧǪǮǬşǨǧǧǧǪ*;4/7 .87*ǧǫǧǪǧǪǧʆǭǬǯǧ /*;7*C ť=>8'3Ş%)8&*Ş'86
.87*ǧǫǧǪǧǪǧʆǭǧǧǧş %BǧǫǧǪǧǪǧʆǮǧǧǧ E-Mail: g.treber@gdv.de
44*)/>/87=ŞŞŞ
www.gdv.de, berlin@gdv.de Publication assistant at GDV.DE
Heike Strauß
Editorial deadline
3. September 2020
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