Insurance Ireland contributes to the European Commission’s Inception Impact Assessment on Solvency II
On 1st July 2020, the European Commission (EC) launched a consultation in preparation of the Review of the Solvency II Directive. Solvency II is the European prudential supervisory framework for insurers. The EC consultation has two steps: a) an Inception Impact Assessment and b) a broader consultation.
Today, Insurance Ireland submitted its comments on the Inception Impact Assessment to the EC. In its contribution, Insurance Ireland stated that the further integration of the EU single market is the key objective of Insurance Ireland’s vision of an integrated, innovative and sustainable EU single market. The Solvency II Review is essential in this regard. The ultimate aim of the review should be to deepen the EU single market for insurance, facilitate the global competitiveness of EU (re)insurers and foster regulatory convergence and consistent consumer protection.
Solvency II needs to strike the right balance between (a) stability and prudence and (b) efficiency and growth. To maintain the industry’s capacity to provide cover for the changing risk landscape and to invest long-term a justified reduction in overall capital requirements is essential. Such an approach would also be vital to allow insurers to effectively contribute to the bigger goals set by the EC’s Green Deal, the Next Generation EU initiative and the Capital Markets Union (CMU).
With regards to the identified objectives, Insurance Ireland and its members would like to highlight the following:
1. The Irish insurance industry appreciates the EC’s commitment to increase regulatory and supervisory convergence enhances fair competition and consistent consumer protection. Closing the gaps in the application and enforcement of the rules is crucial. A regulatory level-playing field and consistent supervision are prerequisites for a true single market. Amendments to Solvency II must ensure that regulatory and supervisory arbitrage are prevented and an efficient and effective governance for cross-border supervision is established.
2. Insurance Ireland welcomes that the EC suggests reviewing the capital requirements. The current calibration of essential factors of the framework is excessive, chiefly the risk margin which underestimates EU (re)insurers’ own funds by more than 100bn EUR in the low rate environment. Such miscalibrations are overly prudent or expose insurers to systematic procyclicality. Thereby, the provisions disincentivise (re)insurers to invest long-term and they hinder them to provide the full risk-taking capacity.
3. The risk proportionate application of Solvency II is a central element of the framework. Insurance Ireland agrees to the assessment of the European Insurance and Occupational Pensions Authority that the transposition of this principle is highly inconsistent. Insurance Ireland and the Dutch Insurance Association (VVN) presented their ideas on a consistent and EU-wide system to enforce the proportionate application of Solvency II in July 2019. The proportionate application of Solvency II must not be left to national discretion. Only an EU-wide approach can ensure a level-playing field even for smaller and less risky insurers.
4. Insurance Ireland welcomes the initiative of the European Commission to include Insurance Guarantee Schemes (IGS) and Recovery & Resolution in the review. While there is a strong believe that the harmonisation of such regimes should be based on the host Member State principle, it is accepted that the political majority prefers a home approach. Nonetheless, the Irish insurance industry believes that consistency must be ensured. Harmonised criteria must ensure the compensation of consumers through IGS for non-life and the continuity of life portfolios through resolution mechanisms, where appropriate.
Finally, Insurance Ireland would like to emphasise that Solvency II must remain a risk-based framework focused on the economic valuation of solvency positions. Limiting the availability of profits embedded in existing business at group level is uneconomic, pro-cyclical and incompatible with an EU single market as it would effectively ring-fence the value of in-force business per local entity.
In addition to its own position, Insurance Ireland also expressed support for the joined European industry position as expressed by Insurance Europe.