Opinion: Angus Scorgie, Head of prudential regulation & international affairs/reinsurance
Delivering on the agreed ambitions
The recent publication of the much awaited report on EU competitiveness by Mario Draghi, the former European Central Bank president, has raised important questions around how to close the massive investment and innovation gaps in Europe.
For European insurers, who are one of the largest institutional investors with around €9.5tn currently invested in the economy, the current Solvency II review is a prime opportunity to enhance the industry's investment capacity and to ensure their global competitiveness, while maintaining a high-level of policyholder protection. This is because the EU's Solvency II, one of the most (if not the most) conservative prudential regime globally, has a major impact on the industry’s capacity to cover risks, its ability to offer products, and the level and type of investments that insurers make.
The European insurance industry welcomes the political agreement on the Solvency II Directive review – the Level 1 text - reached in December 2023. In particular, the sector welcomes the changes introduced by the European Parliament and Council to improve the treatment of long-term business, which creates the potential for much needed improvements in the areas of capital and volatility. However, the final impact of the Solvency II review will now depend heavily on the upcoming Level 2 technical measures which are under discussion.
Welcome developments…
As an industry, our key requests for the Solvency II review were for changes which would result in:
The updated Level 1 Directive, if complemented by consistent changes in the EU's Delegated Acts which set out detailed requirements for applying the Solvency II framework, will broadly deliver on the first two of our key requests.
And unwelcome developments…
However, overall the review will bring increased operational and reporting requirements for the majority of European insurers. This is disappointing and runs against the goal of ensuring the EU remains globally competitive. Reducing the administrative burden by improving proportionality was one of the intended and shared objectives of the industry, European Commission, Council, and Parliament. It is now, more broadly, one of the Commission’s flagship initiatives.
The review has also added significant new layers of requirements. These include short-term liquidity risk management plans (LRMP), sustainability risk plans, long-term climate scenarios in the own risk and solvency assessment (ORSA), audit requirements, additional internal model reporting as well as pre-emptive recovery plans (from the Insurance Recovery and Resolution directive (IRRD)).
At the same time, the review has done little to help reduce the mass of regulatory requirements that insurers face.
Crunch time - the final phase
To realise the potential benefits of the Solvency II review, the insurance industry calls on EU member states to ensure that the Level 2 legislation fully reflects the co-legislators’ political agreement. This is the best course of action and would demonstrate the EU's commitment to unleashing investment, driving the climate and digital transitions, delivering the Capital Markets Union (CMU), and – fundamentally – maintaining international competitiveness. Additionally, the European Commission should uphold its commitment to simplify and reduce reporting burden by 25%.
A closer look at the detail
In July 2024, Insurance Europe published a high-level statement accompanied by three position papers on Improving the treatment of long-term business, Increasing regulatory efficiency (proportionality and reporting) and Solvency II Sustainability risk plans.
These papers outline the industry's views and a package of key proposals for the development of the Level 2 and Level 3 measures under Solvency II, which if implemented, would help increase European insurers’ investment capacity and their ability to compete on the global stage.