Commission Releases Legislative Proposals for Changes to EU Insurance and Reinsurance Regulation
Insurers and reinsurers operating in the EU will be subject to amended solvency rules, new rules regarding risk assessment and management of climate-related risks, a new cross-border resolution mechanism for distressed insurers and a more harmonised EU-level supervisory framework, under a package of insurance reforms unveiled by the Commission.
The far-reaching legislative package, which involves amendments to the Solvency II Directive, a Communication on the review of the directive, and a legislative proposal for a Insurance Recovery and Resolution Directive, are the first major reforms since the introduction of the Solvency II Directive in January 2016.
In summary the proposals encompass:
* a new Insurance Recovery and Resolution Directive that aims to create a single procedure at EU level to aid preparedness in times of financial difficulty and resolve problems with insurers and reinsurers in financial distress;
* a new requirement for industry long-term climate change scenario analysis, which would take into account climate change-related risks that may not always be captured when calculating capital requirements;
* giving the European Insurance and Occupational Pensions Authority (EIOPA) a mandate to conduct centralised climate stress tests on reinsurers, with the Commission launching a Climate Resilience Dialogue to explore ways to improve the collection of insured loss data;
* giving the EIOPA the ability to review new evidence on environmentally or socially harmful investments with a view to potentially making changes to the Solvency II standard formula, and requiring it to prepare a report by 2023;
* creating a new category of low risk profile reinsurers to simplify rules for small and less complex insurers;
* enabling the EIOPA to regularly review evidence on trends on the frequency and severity of natural disasters and EU reinsurers’ exposure to such disasters with a view to potential changes in the Solvency II standard formula catastrophe risk modules;
* revising the eligibility criteria of the existing long-term equity asset class to make it easier for insurers to benefit from preferential capital treatment when providing long-term capital funding to the economy. Under a cautious scenario assuming that only 15% of additional equities would qualify as long-term, the reduction in capital requirements would reach approximately €10.5 billion. This would be a decrease of more than 6% compared to current levels for insurers;
* changing the functioning of the volatility adjustment for other types of equity investments and modulating the level of the capital charge depending on stock markets developments so that it becomes less expensive for insurers to invest in equity when equity markets are falling;
* adjusting the rules as to the insurers that should be included in group supervision, notably in respect to holding companies;
* amending the powers and responsibilities of supervisory authorities over groups operating in the EEA but whose parent company is headquartered in a third country.
The Commission says the aim of the reforms is to allow insurers to contribute to the Covid economic recovery by freeing up capital and modifying the available investment options and progress the Capital Markets Union.
It will also provide an extra safety net for insurers and reinsurers and policyholders and channel funds towards the European Green Deal. Launched in December 2019, this pact aims to cut greenhouse gas emissions by at least 55% by 2030. The freeing up of capital for investment is a key part of the objective, with the Commission estimating that up to €30 billion of capital could be released in the long term at EU level.
However, it has stopped short of tightening of overall capital requirements, noting the sector has remained resilient and well capitalised with an average solvency ratio of 235% at the end of 2020, according to EIOPA data. That ratio is seven percentage points lower than at the end of 2019, but it remains well above the regulatory minimum of 100%. The reforms are likely to result in stricter capital requirements for some insurers and as such these will be implemented gradually up until 2032.
The single set of rules around insurer preparedness, seen as an important part of the EU Capital Markets Union, will fill the current gap; there are currently no cross-border harmonised rules in the event of an insurer failing in the EU.
As the primary objective in a normal corporate insolvency proceeding is to maximise the value of assets of a failed firm in the interest of creditors, in such situations policyholders are left at a disadvantage. As such a crisis resolution mechanism is seen as critical and complements the Commission’s earlier efforts on a crisis resolution for banking.
The proposal will policyholders to maintain their insurance coverage and ensure a smooth transfer of their insurance portfolios while allowing similar results to those of normal insolvency proceedings in terms of allocation of losses to shareholders and creditors.
The legislative package will now be discussed by the European Parliament and Council.
The proposal follows EIOPA’s technical advice on the reforms released in December 2020 and an earlier Commission consultation.
Key documents are as follows:
Communication from the Commission to the European Parliament and the Council on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post pandemic recovery
Text of the proposal for amendments to the Solvency II Directive
Text of the proposal for the recovery and resolution of (re)insurance undertakings