EU rule change offers insurers €90bn capital boost

Newsletter: Europe Express

Brussels has unveiled a short-term capital boost of up to €90bn for Europe’s insurers which it hopes will be used to increase investment in the region’s economy.

The European Commission said its proposals to change the Solvency II regulatory regime, unveiled on Wednesday, would allow EU insurers — which collectively have more than €10tn of assets — to beef up their long-term investments. It builds on the work done by regulator Eiopa, which in December promised an “evolution not revolution” in the framework.

But Insurance Europe, a trade body representing EU insurers, said a temporary reduction in insurers’ capital requirements was unlikely to lead to a change in their behaviour, given their need to take a long-term view.

The commission also announced plans to introduce a resolution process for insurers that fail, similar to that established for the region’s banks in 2015. This would include mechanisms to “bail in” private shareholders and creditors to take the first hit on losses.

The five-year-old Solvency II regime governs how insurers operate, what information they must disclose and the level of capital they must hold. Both the EU and the UK are revamping it, potentially heralding the first major divergence in the European financial rule book since Brexit. 

The Solvency II regime had “proved its worth” during the Covid-19 pandemic, commission vice-president Valdis Dombrovskis told a press conference.

“It has worked well during the crisis and helped EU insurers to get through difficult times,” he said, adding that the review was now especially necessary in light of the economic recovery.

The proposed changes include lowering the capital requirements associated with equity investments, including when stock markets are falling; and amending the so-called volatility adjustment, so that swings in asset prices have a smaller impact on solvency.

The commission said it also planned to adjust the risk margin, a capital buffer, and to exclude more smaller companies from the directive. 

Brussels also wants to boost co-operation between national regulators, aiming to level the playing field. And insurers will be required to conduct long-term scenario analysis of the threat from climate change.

The commission linked the project to its so-called “green deal” for a sustainable pandemic recovery and the work towards a capital markets union within the bloc.

Overall, the objective of the review was to avoid a deterioration of capital buffers, it said. Certain capital requirements would be made stricter but these would be implemented gradually until 2032 — meaning that over the short term, as much as €90bn of capital could be released, but over the longer term that falls to €30bn.

Insurance experts said the detail of this would be key: a reduction in capital requirements could allow companies to return capital to shareholders rather than choose riskier investments.

Insurance Europe said it welcomed the commission’s acknowledgment that capital requirements needed to be reduced.

But only a “significant and permanent reduction of capital” would allow insurers to increase their contribution in financing the region’s recovery, said the group’s deputy director-general Olav Jones.

“This is because insurers must take a long-term view in their strategy and investment decisions,” he said. A significant and lasting capital reduction would also “allow our industry to regain international competitiveness”, he added.

Jörg Asmussen, head of GDV, a trade body for German insurers, said the proposals left “important questions unanswered”, particularly regarding future capital requirements related to long-term liabilities such as pension obligations. Further detail will come in legal amendments known as “delegated acts”.

“It’s a bit like getting a parcel and not knowing what is in it,” Asmussen told the Financial Times.

UK insurers are also pushing for easements to Solvency II. The Association of British Insurers has called for changes that it estimates would allow the industry to redeploy £95bn worth of capital, including passing some of that back to shareholders. 

The UK government has said it sees a “strong case” for reform in this area, but in a speech on Wednesday, giving an update on its Solvency II work, the Bank of England’s prudential policy director Gareth Truran said it was “not obvious that loosening of capital requirements per se would necessarily increase productive investment”.

Analysis needed to be done to consider whether insurers would invest differently, if incentives were changed, he said, and whether newly released capital would be returned to shareholders; invested internally or used to purchase more assets.

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