The EU’s insurance regulator has launched a revamp of its Solvency II capital regime, promising that it will take account of the impact of ultra-low interest rates on the insurance industry.
Insurers have been hit hard by low and negative rates, which reduce the returns they can make on their investments and force them to hold more capital against some types of long-term insurance policies.
Launching its review, the European Insurance and Occupational Pensions Authority said that there was a need for a “proper recognition of the economic situation” and that capital requirements for interest rate risk had to be “corrected”.
The Solvency II regime was launched five years ago after several long delays and heated debate among EU member states. This is the first major review of the way that the system operates.
Insurers have long complained about the regime, saying that it discourages investments in long-term assets such as infrastructure and imposes burdensome and unnecessary reporting requirements.
Eiopa promised that its review would bring “evolution not revolution”.
Gabriel Bernardino, its chairman, said that the proposed changes would “ensure that Solvency II will continue to be a credible and fit for purpose regime, capable of protecting policyholders and contributing to market stability even in stress situations”.
As well as focusing on the impact of low interest rates, the review makes proposals on recovery and resolution regimes for troubled insurers, and on insurance guarantee schemes that protect customers if companies fail.
But the insurance industry hit out at the proposals, saying that they failed to properly address problems with Solvency II.
Olav Jones, the deputy director-general of trade body Insurance Europe, said: “The advice would, in the long run, result in a less competitive European insurance industry that could invest less in the economy and provide fewer long-term savings products and offer lower returns to customers.”
The final decision on what changes will be made to Solvency II rests with the European Commission, the Council of the EU, and the European Parliament, and may not come until 2022.
The UK, which does not have to follow EU rules after Brexit, has already decided to go its own way on Solvency II. For years UK insurers and regulators have said that one part of the regime — known as the risk margin — was unsuitable for the way that the industry operates in the UK.
In October the UK government launched its own review of the rules, saying that changes could “increase the choice and affordability of products available to businesses and households”.
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