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Solvency II 2020 review: why would one of the world’s most prudent and conservative prudential regimes need “prudential enhancements”?

Excessive conservativeness hinders insurers’ ability to help Europe’s transition to a sustainable economy and to provide the long-term products their clients demand

Speaking today at a conference organised by the European Commission on the 2020 review of Solvency II, Insurance Europe president and CEO and chair of UNIQA Insurance Group, Andreas Brandstetter, will say:

“Solvency II is good, but it is not perfect, and the 2020 review is the right opportunity to improve it. However, we definitely don’t need to revolutionise the framework, or to develop solutions to problems that do not exist. To be blunt, it is very difficult to see why one of the world’s most prudent and conservative prudential regimes needs prudential enhancements. What Solvency II needs today is a targeted and focused review, in three areas: reducing barriers to long-term business and investment, making proportionality work in practice and reducing the burden of reporting.”

Other issues to be covered by Brandstetter include:

  • Fixing issues with how Solvency II treats insurers’ long-term business is vital. This means addressing the problems of measurement and capital treatment for long-term savings and guarantees, as these are the products needed to close Europe’s pensions gap and support Europe’s long-term sustainable investment needs.
  • Solvency II’s measurement and calibration of long-term business is not in line with the actual risks that it poses. There is a growing understanding that the risks of long-term investment and long-term guarantees are lower than Solvency II currently assumes. So, capital is calibrated above what is actually justified by the risks. This matters because, in many cases, it can lead to consumers simply no longer having access to the products that they value.
  • Making proportionality a practical reality — rather than a theoretical principle — is also key. Proportionality is an important overarching principle included to avoid unnecessary costs which ultimately customers pay for. Today, very little proportionality is applied in practice. This must be addressed so that the framework really works for all entities to reduce costs and preserve a diversified and competitive European market, for the benefit of consumers.
  • Meaningful reductions must also be made to the regulatory reporting burden to streamline and simplify reporting requirements. Reporting requirements are not only overly burdensome, but significant elements of them are simply not used. We must therefore identify what information is actually useful for supervisors and consumers. For example, merging templates without reducing content increase costs and does not reduce the reporting burden.
  • While low and negative rates are a current reality, it is impossible to predict precisely how much more negative they may go. Although EIOPA has attempted to make such predictions, insurers would argue that its projections are entirely theoretical, extreme and unjustified.
  • There is a global framework for systemic risk – but EIOPA has proposed ideas to gold-plate it in Europe. Given all the protection already offered by Solvency II, this makes no sense and is definitely not helpful to EU insurers’ global competitiveness.

He concluded: "Europe has been set on an ambitious path towards a sustainable future, and the insurance industry can and should be a key contributor. We have the ability to support Europe’s goals, and play a key role in the transition to a sustainable economy. We can only do this to our full potential if we get Solvency II right."

Published 29 January 2020