EU rule change gives insurers € 90 billion capital increase

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Newsletter: Europe Express

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

The European Commission said its proposals for changing the Solvency II regulatory regime, unveiled on Wednesday, would allow EU insurers – which collectively hold more than € 10 billion in assets – to boost their long-term investments. It builds on the work carried out by the regulator Eiopa, which in December promised an “evolution and not a revolution” in the framework.

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

The commission also announced its intention to introduce a resolution process for failing insurers, similar to that established for banks in the region in 2015. This would include mechanisms to “bail out” private shareholders and creditors to take over. the first blow on the losses.

The five-year-old Solvency II regime governs how insurers operate, the information they must disclose and the level of capital they must hold. The EU and UK are reorganizing it, potentially announcing the first major divergence in the EU financial rulebook since Brexit.

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

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

The proposed changes include lowering the capital requirements associated with equity investments, including when stock markets are down; and changing the volatility adjustment so that changes in asset prices have less of an impact on solvency.

The commission said it also plans to adjust the risk margin, a capital cushion, and exclude more small businesses from the directive.

Brussels also wants to strengthen cooperation between national regulators, with the aim of leveling the rules of the game. And insurers will be required to carry out a long-term scenario analysis of the threat of climate change.

Overall, the aim of the review was to avoid a deterioration in the capital buffers, he said. Some capital requirements would be made more stringent but they would be implemented gradually until 2032 – which means that in the short term up to € 90 billion of capital could be released, but in the longer term, this drops to 30 billion euros.

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

Insurance Europe said it welcomed the committee’s recognition of the need to reduce capital requirements.

But only a “significant and permanent capital reduction” would allow insurers to increase their contribution to financing the recovery of the region, said Group Deputy CEO Olav Jones.

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

Jörg Asmussen, director of GDV, a professional 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 details will come in legal changes known as “delegated acts”.

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

The UK government said it saw “strong arguments” for Solvency II reform, but in a speech on Wednesday providing an update on its work on Solvency II, the Bank’s prudential policy director England, Gareth Truran, said it was “not clear that easing capital requirements per se would necessarily increase business investment.”

Analysis needed to be done to determine whether insurers would invest differently, whether incentives were changed, he said, and whether the newly paid-up capital would be returned to shareholders; invested internally or used to buy more assets.

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