Solvency II review pushed back by European Commission

The battles lines that have been drawn up over the European Insurance and Occupational Pensions Authority’s review of Solvency II were on display at the pan-European regulators’ recent annual conference in Frankfurt.

EIOPA has been pushing hard to stick to its original timetable of completing a review during 2020 but its extensive proposals for change have come under fire from insurers.

Michaela Koller, director general of Insurance Europe, the trade body representing insurers, told the conference that its members had expressed concern over the extent and consequences of the changes being proposed: “It would amount to an overhaul. It would significantly increase capital requirements, significantly increase operational burdens and create new powers for supervisors.”

EIOPA’s chairman, Gabriel Bernardino, put up a spirited defence of the regulator’s approach.

“Since its implementation, Solvency II has proved an effective framework, so our review will not question the fundamentals. Instead the outcome of this review will be evolution rather than revolution. Beyond the necessary adjustment of the interest rate risk calibration, that was not taken on board by the European Commission in the 2018 review, EIOPA aims for a balanced impact of its proposals.

“Last month we launched our public consultation on an Opinion to set out technical advice for the 2020 review of Solvency II. The call for advice covers issues like the review of long-term guarantee measures; the potential introduction of new regulatory tools in the Solvency II Directive, notably on macro-prudential issues, recovery and resolution and insurance guarantee schemes; and revisions to the existing Solvency II framework including in relation to freedom of services and establishment, reporting and disclosure, and the solvency capital requirement.

“Through the review, we will also address proportionality, and EIOPA has put forward proposals aiming at a substantial reduction of reporting requirements for undertakings with a low risk profile.

“Furthermore, it is my objective to ensure that the review will deliver a more appropriate recognition of illiquidity, both on the valuation of insurance liabilities and on the calibration of asset risks, improving risk-sensitivity, facilitating the design of long-term savings with terminal guarantees and incentivising long-term investments”.

The prospects of the review being completed next year were dealt a major blow when Didier Millerot, head of the European Commission’s insurance and pensions unit spoke at the conference. While defending EIOPA’s approach, he made is clear that the EU is unlikely to adopt proposed changes to the bloc's insurance capital requirements rulebook before the end of 2022.

“Proportionality and simplification are important themes. It’s easy to say but not easy to do”, said Millerot.

Since the conference, Valdis Dombrovskis, the re-appointed Vice-President of the European Commission and head of the Directorate General for financial stability, financial services and capital markets, has announced that there will be a one-day conference in Brussels on 29 January to explore the concerns around the review.

The conference will also gather ideas on whether new risks or developments that insurers face or are going to face would require regulatory action as well as examining EIOPA’s proposals for boosting the rules around guarantee schemes.

This move by the Commission comes just after the consultation period on the EIOPA proposals closes on 15 January. It is seen as an unusual step as the Commission would normally wait until the regulator had processed the responses and published its own response which, even on the original tight timetable, was not due until June next year.