David Worsfold EIOPA spells out its vision on capital standards and sustainable investments and warns again on Brexit. There seems to be no stopping the relentless flow of policy announcements from the European Insurance and Occupational Pensions Authority, especially now the threat of merger with the European Banking Agency has been lifted. In a major speech at the recent Insurance Risk Conference in London, Dr Manuela Zweimueller, EIOPA's Head of Policy Department said the regulator was continuing to tighten up its rules on capital standards for internationally active insurance groups. Its aim is to agree a set of standards that deliver the same outcomes across all jurisdictions.
What it fears as it pursues this admirable objective is that the standards end up being set lower than it would be comfortable with. For this reason, EIOPA is prepared to play a long game to reach the right agreement, said Dr Zweimueller. “An international standard should be of high quality and not a lowest common denominator between the current regional regimes.
EIOPA supports the development of a robust version of an international capital standard by the end of 2019. This version should then be used during a period of two or three years by international colleges of supervisors to ensure that all supervisors are comfortable with it. A final and fine-tuned standard should then emerge from this practical experience”. Add that together and we are looking into the middle of the next decade for the fully operational international capital standards to be in place. Rather more urgency is being applied to promoting what EIOPA labels “sustainable finance”, a wide-ranging set of initiatives that include encouraging ESG (environmental, social and governence) investment strategies.
A High Level Expert Group on Sustainable Finance is in place and has already given some clear indications of what is going to be expected of insurers, including the threat of an ESG league table, said Dr Zweimueller: “With regard to the investments of insurers, sustainability can be further promoted by establishing a clear EU taxonomy for sustainable assets and by labelling sustainable assets. Additionally, comparable disclosure of insurers on their sustainability policies and investments, including ESG factors in insurers’ risk and investment management, in particular in their own risk and solvency assessment (ORSA), and by public ESG-grading of insurers would contribute to sustainability”.
For those investment managers fearful that this might drive boards to set investment objectives that undermine the wider requirements to maintain solvency with investments well-matched to risks and produce returns that contribute to corporate profitability, Dr Zweimueller offered some words of reassurance: “Insurers need to hold capital to absorb losses they may incur on their investments. Ignoring these risks in capital requirements may result in misallocation of funding and facilitate boom and bust cycles. Measures taken to promote sustainability should be in line with general Solvency II principles and should not put at risk the financial stability which is a prerequisite for sustainable investment and meeting ESG objectives”.
As he was speaking in London, he couldn’t let the opportunity pass to remind people what EIOPA expects as firms respond to the pressures of Brexit, especially the growing realisation that many firms will have to relocate parts of their business. These warnings aren’t new as Gabriel Bernardino, Chairman of EIOPA, spelt them out when the regulator published an opinion on Brexit back in July. The opinion provides guidance and sets out principles in the areas of authorisation and approvals, governance and risk management, outsourcing of critical and important activities as well as future supervision and monitoring. It makes crystal clear that relocations that are in name only – “letter boxes or empty shells” in their language – will not be tolerated.
Dr Zweimueller also stepped back to look at the wider investment horizon and there he sounded a cautious note: “From a macroeconomic perspective, there are some positive developments. Volatility has decreased and global inflation rates are fluctuating near the 2% medium-term inflation target. Despite these positive signs, the continuing low-yield environment and the observation that market fundamentals might not properly reflect the underlying credit risk are still important concerns. A material re-pricing of risk is a scenario that we cannot rule out, especially in the context of the current geopolitical situation. This would put an extra pressure on insurers’ asset portfolios”. The overall impression from this speech and the appearance by Bernardino at the European Parliament’s Economic and Monetary Affairs Committee later in October is of a regulator very confident in its ability to drive the sectors in its charge in the direction it believes they should be heading.