In response to the European Commission’s update yesterday on the progress of its Capital Markets Union (CMU) project, Olav Jones, deputy director general of Insurance Europe, commented:
“As the EU’s largest institutional investors, Europe’s insurers have always supported the aim of the European Commission’s Capital Markets Union (CMU) project to unlock capital around Europe. However, while some progress has undoubtedly been made, several points remain to be addressed.
“On the review of insurers’ Solvency II regulatory framework, we feel that the EC is really missing an opportunity to unlock capital that insurers could be using to boost Europe’s economy.”
One of the aims of the CMU is to address regulatory barriers to investment, including prudential issues under Solvency II that prevent more long-term investment by the insurance industry.
“Some welcome improvements have been made with respect to the treatment of STS securitisations and infrastructure, but more action is needed and possible,” said Jones. “Several important aspects — equity, the risk margin, the volatility adjustment and the loss absorbing capacity of deferred taxes (LAC DT) — are not being appropriately addressed in the 2018 Solvency II review.”
In its CMU progress report, the European Commission refers to adjustments it has proposed to insurers’ investment in equity. Unfortunately, the draft EC proposal currently being consulted on as part of the Solvency II Delegated Acts in this area would not achieve its aim of unlocking investment, as the way it is designed makes it unlikely any insurer would qualify for the calibration.
The insurance industry strongly believes that this lack of effective action by the Commission is a missed opportunity. The unnecessarily high capital requirements for insurers’ long-term equity need to be reviewed to reflect the true long-term risk exposure of this asset class.