Proposed changes to Solvency II

On 15 October 2019, EIOPA published a Consultation Paper on the Opinion on the 2020 review of the Solvency II Directive, as a result of a call for advice (in February 2019) issued by the European Commission. EIOPA welcomes comments on the draft response by 15 January 2020, ahead of publication of final advice in June 2020.

The call for advice includes 19 topics, which cover three main areas:

• the review of the long term guarantee measures;
• the potential introduction of new regulatory tools in the Solvency II Directive; and
• revisions to the existing Solvency II framework.

The following outlines the main considerations and proposals in the consultation paper:

• a later starting point for the extrapolation of risk-free interest rates or to change the extrapolation method to take into account market information beyond the starting point, aiming to avoid underestimation of technical provisions and inappropriate risk management incentives;
• changing the calculation of the volatility adjustment to risk-free interest rates to mitigate overshooting effects and to reflect the illiquidity characteristics of insurance liabilities;
• increasing the calibration of the interest rate risk submodule, as the current calibration does not take into account the possibility of a steep fall of interest rates experienced in past years and the existence of negative interest rates;
• including the macro-prudential perspective in the Solvency II Directive; and
• a minimum harmonised and comprehensive recovery and resolution framework for (re)insurers to deliver increased policyholder protection and financial stability in the European Union.

EIOPA identified many divergent practices in the calculation of the best estimate liabilities. It therefore proposes clarification of some aspects of the legal framework, including contract boundaries, the definition of expected profits in future premiums and expense assumptions for insurance undertakings that have discontinued one product type or their whole business.

EIOPA also considered changes to the risk margin and spread risk module but proposes no change.

Other than the proposed change to the interest rate risk module, EIOPA expects the effect of the changes to be broadly neutral for the industry as a whole.

EIOPA has also considered a number of aspects of proportionality. Its proposals would lead to more insurers being exempt from Solvency II, with proposals to double the thresholds related to technical provisions and to allow Member States to increase the current premium income threshold from €5m to €25m. It estimates that, with a premium income threshold moved to €25m, this would exclude 46 UK insurers currently within the Solvency II regime. Each country’s regulator would then decide what regime could apply and, in our experience with insurers near the current thresholds, the PRA is likely to impose at least some aspects of Solvency II on any technically excluded from Solvency II.

EIOPA also proposes:

• simplification of the counterparty default risk module,
• allowing more simplified approaches to immaterial risks, and
• improving the proportionality of governance requirements, in particular on key functions, own risk and solvency assessment, written policies and administrative, management and supervisory bodies.

A stakeholder event on the review is planned for December 2019, and comments can be emailed to cp-19-006@eiopa.europa.eu by 15 January 2020.

The full consultation paper and background document can be found here: https://eiopa.europa.eu/Pages/Consultation-Paper-on-the-Opinion-on-the-2020-review-of-Solvency-II.aspx