Today, Insurance Ireland published its reply to a European Commission consultation on the review of the Solvency II Directive. Solvency II is the common prudential regulatory regime for insurers in the EU. The start of its application in 2016 was a milestone for the integration of the internal market for insurance. The review of the framework is the opportunity to build-up on the experiences of the last four years and make the next steps.

Insurance Ireland calls on the European Commission to present legislative proposals which strengthen the integration of the EU single market for insurance as well as regulatory and supervisory convergence. The consistent application of the Solvency II framework will allow insurers to provide their services across the Union, increasing consumer choice while ensuring the consistent protection of all EU citizens. The provision of specialised and targeted solutions will enhance the functionality of the single market and allow insurers, particularly new market participants like InsurTechs, to scale their businesses across the EU market of 440 million people rather than in Ireland, only.

In order to enhance the EU single market for insurance, it will be important that a common European approach is ensured for crucial elements of the framework, e.g. the proportionate application of Solvency II. The processes on cross-border supervision need to be improved without risking the creation of additional burdens for the single market. Insurance Ireland made concrete proposals on both issues and hopes that the European Commission will consider its input in its legislative proposal.

A true single market will significantly improve the global competitiveness of EU insurers. But the further integration of the single market is only one aspect of the Solvency II review which can facilitate that EU insurers will be able to compete at an international level.

Solvency II is the most advanced supervisory regime worldwide. At the same time, it is overly conservative and might lead to artificial volatility in its results. As a consequence, insurers hold an excessive amount of own funds which could be used to be invested or to provide additional cover to the market. Europe is at an important moment, the Covid-19 crisis is threatening global economies and the fight against climate change is increasingly important. Allowing insurers to provide their full investment capacity to contribute to the economic recovery, necessary (digital) infrastructures and sustainable projects is crucial. Equally important is that insurers are able to provide the necessary cover to society and economy to support the recovery and provide consumers with the necessary peace of mind. The review of key calibrations of Solvency II is indispensable in this respect.

An outstanding example is the risk margin. The risk margin is a conceptual approach to adjust the system to the general principles of Solvency II. The risk margin expresses the capital equivalent which would be necessary to sell the portfolio of a failing insurer to another insurance company.

Following this logic, the risk margin is the “surcharge” to the price for an insurer taking-over the portfolio from a failing insurer. The risk margin has a very significant impact on the overall solvency capital requirement (SCR) of insurers. Due to its concept, its impact is higher for insurers offering products with long durations, i.e. life insurances and some long-tail non-life business. Looking into the dynamics of the insurance market and the functioning of the long-term business, the impact is detrimental. For some long-term exposures, the risk margin can overshoot the effective SCR. This leads to the tremendous miscalibration and consequently limits insurers’ ability to efficiently provide protection to customers and invest long-term as mentioned above.

Only a properly calibrated Risk Margin will allow insurers to provide their full capacity to invest and provide cover in order to facilitate the economic recovery and a transition towards a sustainable EU economy and society.

Finally, we would like to underline the importance that changes and adjustments should be made at EU level and that the Solvency II review is the appropriate vehicle for such changes. National initiatives on core elements as well as on technical details will lead to fragmentation of the single market, competitive disadvantages or regulatory arbitrage harming integration and consumer protection across the Union.

An example in this respect are additional measures to protect consumers in the event of an insurer failing. Solvency II already provides for a consistent framework for the intervention of supervisory authorities where an insurer is struggling and for steps to be taken if an insurer is likely to breach its SCR. As a next step, the European Commission is assessing which additional measures need to be taken, in terms of recovery & resolution mechanisms and potential guarantee schemes. Examples for such measures exist in some EU Member States. A consistent European approach is already discussed as part of the review. Insurance Ireland and its members support the European Commission’s idea to develop a common and consistent framework on recovery & resolution and insurance guarantee schemes at EU level.

While most of the future of Solvency II will be subject to the EU legislative process, Insurance Ireland calls on Irish regulators and supervisors to not diverge pro-activelysuch as the potential divergence with the current CBI consultation on recovery planning.Ireland is a major hub for international insurance, the 5th biggest market for insurance in the EU and the 2nd largest for reinsurance. Ireland should not put an extra burden on itself on its way to economic recovery and success by undermining its own competitiveness in an integrated single market for insurance in Europe.

On a side note, Insurance Ireland wants to express its disappointment that the European Commission (EC) limited the potential input from stakeholders by only allowing for the elaboration and justification of answers if the “right box” was ticked in the multiple-choice questionnaire. Insurance Ireland chose to adjust itself to the limitation for some question. Nonetheless, we consider this unnecessary restriction as a backdrop for the EC to assess the full picture of the issues under consultation and a threat to better regulation standards.