REGULATORY SCRUTINY BOARD OPINION Review of the Solvency II Directive

EUROPEAN COMMISSION
SEC(2021) 620
23.4.2021
REGULATORY SCRUTINY BOARD OPINION
Review of the Solvency II Directive
COM(2021) 581
COM(2021) 582
SWD(2021) 260
SWD(2021) 261
Europaudvalget 2021
KOM (2021) 0581 - SEK-dokument
Offentligt
________________________________
This opinion concerns a draft impact assessment which may differ from the final version.
Commission européenne, B-1049 Bruxelles - Belgium. Office: BERL 08/010. E-mail: regulatory-scrutiny-board@ec.europa.eu
EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Review of Solvency II Directive on taking up and pursuit
of insurance and reinsurance business
Overall opinion: POSITIVE
(A) Policy context
The Solvency II Directive entered into effect on 1 January 2016. It introduced a
harmonised framework for the supervision of insurance and reinsurance companies in the
Union. Solvency II introduced risk-based capital requirements, stricter governance and risk
management rules, and enhanced supervisory reporting and public disclosure. As such, it
aims to protect insurers’ clients (‘policyholders’) and preserve the stability of the financial
system.
Solvency II contains review clauses requiring the Commission to assess and, where
necessary, propose changes to four areas of the framework. These areas concern: long-term
guarantees and measures on equity risk; the standard formula for solvency capital
requirements; minimum capital requirements; and group supervision and capital
management within a group of insurance or reinsurance undertakings, as well as insurance
guarantee schemes (IGSs).
Moreover, this review extends to additional issues that the Commission services have
identified in other parts of the Solvency II framework as deserving an assessment.
(B) Summary of findings
The Board notes the useful additional information provided in advance of the
meeting and commitments to make changes to the report.
The Board gives a positive opinion. The Board also considers that the report should
further improve with respect to the following aspect:
(1) The report does not sufficiently develop the problem analysis and narrative in a
consistent way. It does not sufficiently present the overall simplification
potential.
2
(C) What to improve
(1) The report should explain why it does not analyse digital transition challenges. It
should indicate whether other existing or planned legislation tackles this issue.
(2) The problem description should better explain the trade-offs between prudential
objectives and more general economic objectives, especially for equity and green
investments. To provide a clearer basis for the intervention logic, it should explain better
where existing requirements could be relaxed without endangering prudential objectives.
(3) The report could further clarify to what extent the options are future-proof, including
through a qualitative assessment of why they are considered fit for purpose when taken in a
combined way.
(4) The report should elaborate on the reasons for deviating from EIOPA’s advice under
policy dimension ‘Insufficient proportionality of prudential rules’, including by further
clarifying the potential negative effects of the EIOPA option and the added value of the
preferred option.
(5) On the resolution part, the report should discuss possible alternative options and why
these were discarded. It should also better explain how incremental costs and benefits
increase as a result of complementary options building up on each other. It should clarify
why the preferred set of combined options overall performs best in terms of effectiveness
and efficiency.
(6) The report should provide an overall overview of costs and benefits of the combination
of options it recommends. It should also further clarify the overall impact of the
simplification measures.
The Board notes the estimated costs and benefits of the preferred option(s) in this
initiative, as summarised in the attached quantification tables.
Some more technical comments have been sent directly to the author DG.
(D) Conclusion
The DG may proceed with the initiative.
The DG must take these recommendations into account before launching the
interservice consultation.
If there are any changes in the choice or design of the preferred option in the final
version of the report, the DG may need to further adjust the attached quantification
tables to reflect this.
Full title Review of measures on taking up and pursuit of the insurance
and reinsurance business (Solvency II)
Reference number PLAN/2019/5384
Submitted to RSB on 19 March 2021
Date of RSB meeting 21 April 2021
3
ANNEX – Quantification tables extracted from the draft impact assessment report
The following tables contain information on the costs and benefits of the initiative on
which the Board has given its opinion, as presented above.
If the draft report has been revised in line with the Board’s recommendations, the content
of these tables may be different from those in the final version of the impact assessment
report, as published by the Commission.
Problem 1: Limited incentives for insurers to contribute to the long-term
financing and the greening of the European economy
PREFERRED OPTION: FACILITATE LONG-TERM INVESTMENTS IN EQUITY
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Improved ability
to contribute to
the long-term
financing of the
economy
By facilitating the use of the long-term
equity asset class that is subject to a
preferential capital treatment, insurers will
find it less costly to make long-term
investments in equity. As a minimum EUR
22 billion of additional equities would be
eligible to the preferential treatment
according to EIOPA’s impact assessment.
Insurers are the main recipients of this
benefit. The quantification of the impact
by EIOPA was complex due to limited
feedback from stakeholders. As there are
still conditions attached to the benefit of
using the long-term equity asset class,
the extent of its use depends on the
willingness of insurers to comply with
the criteria (notably the willingness to
invest for the long-term). The additional
equities that are eligible would imply a
lower total capital charge for equity
investments (see next row) which may
be further invested in equity).
Reduction in
overall capital
requirements
By facilitating the use of the long-term
equity asset class, all else equal, the
measure would reduce capital requirements
by at least € 3 billion (all else equal).
Insurers would be the main recipients of
this benefit. Even if insurers do not
invest more in equity, they would benefit
from a decrease in capital requirements
by extending their use of the long-term
equity asset class.
More effective
supervision
Clearer and simpler criteria to be met to use
the long-term equity asset class
More legal certainty for supervisors in
supervising the use of the long-term
equity asset class.
International
competitiveness
Reduced capital charges on long-term
investments in equity improves the excess
capital over capital requirements of EU
insurers, which facilitates international
expansion (either by selling new products
with guarantees in foreign markets or by
acquiring new foreign subsidiaries)
The main recipients of this benefit are
insurance companies.
Indirect benefits
More incentives to As green investments require more long- Insurers are the main recipients of this
4
contribute to the
greening of the
economy
term financing, and capital financing is
more effective than debt financing in
achieving a reduction of greenhouse gas
emissions1
, the incentives for insurers to
make more long-term investments in equity
also provides indirect incentives in long-
term and green investments in the form of
equity.
benefit.
More access to
capital financing
by SMEs
As capital charges on unlisted equity (i.e.
including those from SMEs) are higher than
those on listed equities (few SMEs are
actually listed), the benefit of being
classified as long-term equities is even
bigger for unlisted equities. Therefore, this
will provide additional incentives for
insurers to invest in unlisted equity.
SMEs will be indirect beneficiaries of
the revised criteria for long-term
investments.
II. Overview of costs – Preferred option
Citizens/Consumers Businesses Administrations
One-
off
Recurrent One-off Recurre
nt
One-off Recurrent
Review
the
eligibility
criteria for
long-term
investmen
ts in
equity
Direct
costs
Slight
reduction in
the level of
policyholder
protection
compared to
current rules2
Compliance
costs to ensure
eligibility
criteria for
long-term
equity
investments
are met
Supervision of
insurers’
compliance
with new
criteria for
long-term
equity
investments
Indirec
t costs
Monitoring of the
impact of the new
rules on insurers’
risk taking activities
and on financial
stability risks by
supervisors
PREFERRED OPTION: STRENGTHEN “PILLAR 2” REQUIREMENTS IN RELATION TO CLIMATE CHANGE
AND SUSTAINABILITY RISKS
I. Overview of Benefits (total for all provisions) – Preferred Option
1
See e.g. European Central Bank, Research Bulletin No. 64, “Finance and decarbonisation: why equity
markets do it better”, 27 November 2019 (link).
2
This is due to the fact that according to EIOPA, the 22% capital charge is not supported by evidence.
However, the reduction in policyholder protection is deemed limited as the revised eligibility criteria for long
term investments in equity would be broadly in line with EIOPA’s general approach on this issue.
5
Description Amount Comments
Direct benefits
More robust risk
management
requirements
concerning climate
and sustainability
risks
Increased understanding of climate and
environmental risks by insurance
companies and decisions by insurers will
have to reflect those risks.
Stakeholders who benefit:
 Policyholders;
 Beneficiaries;
 Investors in insurance
companies
Harmonised
approach to
management and
supervision of
climate and
environmental risks
Clarified “Pillar 2” rules would provide a
harmonised set of rules for the integration
of climate and environmental risk across the
EU and avoid diverging practices in
implementation and supervision.
Stakeholders who benefit:
 insurance companies, in
particular those that are part of
an insurance group with
insurers in several Member
States;
 supervisory authorities.
Indirect benefits
Indirect incentives
for an increase in
sustainable
investments
More robust risk management requirements
concerning climate and sustainability risks
provide indirect incentives for sustainable
investments and for divestments from
environmentally harmful assets. This may
result in a reduction of greenhouse gas
emissions;
Stakeholders who benefit:
 investees with sustainable
activities;
 policyholders with sustainable
activities;
 any parts of society that might
be affected by the negative
impacts of climate change.
Positive contribution
to financial stability
By strengthening “Pillar 2” requirements in
relation to sustainability risks, insurers
would be more resilient to climate and
sustainability risks, which may materialise
over the long run and impact significant
parts of the sector at the same time.
A better prevention and management
of the systemic nature of climate
change would benefit the society and
the economy at large and thereby also
insurers.
II. Overview of costs – Preferred option
Citizens/Consumers Businesses Administrations
One-
off
Recurrent One-off Recurrent One-off Recurrent
Strengthen
“Pillar 2”
requirement
s in relation
to climate
change and
sustainabilit
y risks
Direct
costs
None Increase in
insurance
premiums due to
implementation
cost that insurers
eventually pass
on to consumers
Need to
build up
capacity on
climate and
environment
al risk
management
Less than
EUR 200
000 per
annum and
entity for
compliance
3
Need to build
up capacity on
supervision of
climate and
environmental
risk
management
Need to
maintain
capacity on
supervision
of climate
and
environmen
tal risk
managemen
3
See SWD(2018) 264, page 47 (link) and explanations provided in section 6.1.3.
6
t
Indirec
t costs
None None None None None None
Problem 2: Insufficient risk sensitivity and limited ability of the framework to
mitigate volatility of insurers’ solvency position
PREFERRED OPTION: ADDRESS ISSUES OF RISK SENSITIVITY AND VOLATILITY WHILE BALANCING
THE CUMULATIVE EFFECT OF THE CHANGES
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Improved
ability to
contribute to
the long-term
financing of
the economy
The reduced volatility of the framework would
incentivise long-termism in underwriting and
investment decisions by insurers. In addition, as the
overall impact of the review in terms of
quantitative requirements would be balanced
(limited decrease in capital surplus), there would no
longer be any hindrance to further investments by
insurance companies.
Insurers would be the main
recipients of this benefit.
Reduced
volatility in
solvency
position of
insurance
companies
Short-term volatility would be significantly
mitigated, and the framework would address the
issues of overshooting and undershooting as
described in the evaluation annex. Solvency ratios
would become more stable
Insurers would be the main
recipients of this benefit.
Enhanced risk
sensitivity
The framework would better capture the protracted
low and even negative interest rates environment in
standard formula capital requirements and in the
valuation of insurers’ liabilities towards
policyholders
The main recipients are
policyholders who would benefit
from enhanced policyholder
protection. This would also benefit
insurers, which would have stronger
incentives for robust risk
management in relation to interest
rate risk.
Improved
international
competitivenes
s
The reduced volatility of the framework would
foster long-termism in investment and underwriting
activities. More stable solvency ratios also facilitate
business planning and strategic planning (notably
for international expansion).
Insurers would be the main
recipients of this benefit
Lower capital
requirements
in the short
term
Due to the phasing-in of the changes on interest
rates which have a negative impact over at least 5
years, as changes with a positive impact would
apply from day 1, this would lead to a short term
improvement in insurers’ solvency position.
Insurers would be the main
recipients of this benefit
Indirect benefits
Positive
contribution to
The reduced volatility of the framework would
avoid procyclical behaviour by insurance
Recipients of this benefit are citizens
and businesses at large as well as
7
financial
stability
companies in stressed situations. Similarly, by
better capturing the low interest rate environment,
the framework would reduce the risk of excessive
risk taking by insurers which would be incentivised
to have robust risk management and asset-liability
management strategies.
national governments (less
likelihood to involve taxpayer’s
money to address the consequences
of a financial crisis).
II. Overview of costs – Preferred option
Citizens/Consum
ers
Businesses Administrations
One-
off
Recurre
nt
One-off Recurrent One-off Recurre
nt
Adapting
the
framewor
k to
address
volatility
Direct
costs
More complexity
to comply with
new calculation
approach of the
volatility
adjustment. Still,
limited
implementation
cost
Increased
complexity will
require resources
to supervise the
appropriate
application of new
rules
Indirec
t costs
Adapting
the
framewor
k to
improve
risk
sensitivity
Direct
costs
Need to adapt IT
systems every year
in the short term in
view of the
progressive
implementation of
new rules during
the phasing-in
period.
Increase in
capital
requirements in
the long term
when rates are
low (as the
framework
would be more
risk sensitive in
relation to
interest rates)
During the
phasing-in period
where capital
requirement do not
fully reflect the
actual risks from
the protracted low-
yield environment,
need to monitor
insurers’ behaviour
to ensure that there
is no excessive
risk-taking
Indirec
t costs
Problem 3: Insufficient proportionality of the current prudential rules
generating unnecessary administrative and compliance costs
PREFERRED OPTION: GIVE PRIORITY TO ENHANCING THE PROPORTIONALITY PRINCIPLE WITHIN TO
SOLVENCY II AND MAKE A LOWER CHANGE TO THE EXCLUSION THRESHOLDS THAN WHAT IS
PROPOSED BY EIOPA
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
8
Direct benefits
Compliance cost
reductions by way of
exclusion from
Solvency II
According to EIOPA’s impact
assessment, by extending the threshold
of exclusion from Solvency II, a
maximum of 186 insurers would be
excluded from Solvency II. This could
represent a reduction in ongoing
compliance cost of up to € 500 million
The recipients of this benefit are
insurers. Considering that some Member
States may decide to keep the current
exclusion thresholds, the number of
insurers which may be actually excluded
could be lower than 186. Besides, some
insurers may prefer to continue under
Solvency II, notably in order to benefit
from the passporting regime.
Compliance cost
reductions by way of
enhancing
proportionality for
those insurers subject
to Solvency II.
The expected number of insurers
concerned would be in the range between
249 and 435, the latter in case the
existing exclusion thresholds from
Solvency II were not updated by
Member States. For those insurers,
automatic proportionate rules would
apply, which could reduce ongoing
compliance costs, up to EUR 50 million,
according with the estimations of the
Commission Services.
The recipients of this benefit are
insurers. Additional firms could benefit
from proportionality, but conditioned to
approval by the supervisor (case by case
analysis).
Indirect benefits
Improved
competition within
the Single Market for
insurance services.
The high cost of compliance is a barrier
for new entries in the sector. By reducing
the cost of compliance of the small and
less risky insurers, it will be a reduction
of the operating costs that will contribute
to enhancing the profitability of the SME
in the EU
Policyholders will benefit from a well-
diversified offer of products coming
from traditional firms and from new
players.
II. Overview of costs – Preferred option
Citizens/Consum
ers
Businesses Administrations
One-
off
Recurre
nt
One-off Recurrent One-off Recurrent
Increase
the
thresholds
of
mandator
y
applicatio
n of
Solvency
II
Direct costs
Compliance cost
with national
prudential rules,
which in
principle, should
be lower than
Solvency II,
otherwise, the
insurer can
continue applying
Solvency II
Ongoing
compliance
cost with
national
prudential
rules.
Preparation of
two supervisory
teams in case a
national regime
was not
implemented so
far, and no
insurer was
under national
regimes.
Ongoing
training for
supervisors
to be
knowledgea
ble about
two
different
regimes.
Indirect
9
costs
Enhance
the
proportion
ality
within the
framewor
k
Direct costs
Submission by
insurance
companies of
notification/
applications in
order to benefit
from
proportionality
measures.
Submission
of regular
reporting
template to
supervisors
on the
proportionali
ty measures
used.
Additional cost
for supervisors
when assessing
the notifications
of the low-risk
profile insurers
and approval
process.
Ongoing
monitoring
of the
proportiona
lity
measures
applied by
insurers.
Indirect
costs
Problem 4: Deficiencies in the supervision of (cross-border) insurance
companies and groups, and inadequate protection of policyholders against
insurers’ failures
PREFERRED OPTION: IMPROVE THE QUALITY OF SUPERVISION BY STRENGTHENING OR CLARIFYING
RULES ON CERTAIN ASPECTS, IN PARTICULAR IN RELATION TO CROSS-BORDER AND TO GROUP
SUPERVISION
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Enhance the
protection
of
policyholde
rs
The improvement of the clarity and robustness of the Solvency II
framework based on the preferred option would improve the
governance and financial robustness of insurance groups. Through the
increase in quality in supervision it would also improve the ability of
the supervisors to protect policyholders and beneficiaries both, in
group and in cross border supervision. On the latter stronger
coordination by EIOPA would ensure solutions in case of
disagreement between authorities on complex cross-border cases and
prevent possible insurer failures with negative effect on the
policyholders and beneficiaries. Higher consistency of supervision
would also contribute to a more harmonised level of policyholder
protection.
Policyholders would
be the main
recipients of this
benefit.
Enhanced
risk
sensitivity
The framework would better reflect all risks as it would lead to a
clearer and more robust regulatory framework in terms of how to
assess capital transferability or how entities from different financial
sectors (e.g. banks) or countries (e.g. subsidiaries from third countries)
should contribute to group risks.
Insurers and
indirectly the
policyholders would
be the main
recipients of this
benefit.
More
effective
supervision
The framework will become clearer and more robust, existing gaps
and uncertainties would be removed. Due to the stronger focus on
cross-border supervision and cooperation between national authorities,
the quality of the cross border supervision and the convergence of the
supervision of insurance groups would be improved.
Insurers and
indirectly the
policyholders would
be the recipients of
this benefit.
Internationa
l
The preferred option (implying stricter rules governing the supervision
of groups headquartered outside Europe) will improve the monitoring
Insurers would be
the main recipients
10
competitive
ness
of third-country risk exposures for European entities, and more have
more focus on capital and financial outflows from the European
companies to the wider international part of the group. Reducing the
risk of regulatory arbitrage could also have a positive impact on
international competitiveness.
of this benefit.
Improved
ability to
contribute
to the long-
term
financing of
the
economy
Improved rules on group supervision would incentivise insurance
groups to optimise their capital allocation and diversify their risks
across the different entities of the group, with potentially positive
impacts on the ability to provide funding in long term and sustainable
assets across Europe.
Insurers would be
the main recipients
of this benefit.
Indirect benefits
Positive
contribution
to financial
stability
The increased risk sensitivity and of governance aspects through
clarifying and strengthening the framework in group supervision
would increase the resilience of insurance groups and thus the sector,
which might lead to a greater resilience in stressed situations.
Recipients of this
benefit are citizens
and businesses at
large as well as
national
governments (less
likelihood to involve
taxpayer’s money to
address the
consequences of a
financial crisis).
Contributio
n to a more
sustainable
and resilient
European
economy
The preferred option will contribute to the functioning, and therefore
the trust in the internal market and optimise the capital allocation of
insurance groups. Further integration of the Single Market for
insurance services stemming from this option can stimulate the cross-
border supply of innovative insurance solutions, including those
covering risks related to natural catastrophe, climate change. The
improved rules on the group supervision would incentivise insurance
groups to diversify their risks across the different entities of the group,
with potential positive impact on the ability to provide funding in long
term and sustainable assets across Europe.
Citizens and
businesses would be
the main recipients
of this benefit.
II. Overview of costs – Preferred option
Citizens/Consumers Businesses Administrations
One-
off
Recurrent One-off Recurrent One-off Recurrent
Review of
deficiencies
in the
supervision
of (cross-
border)
insurance
companies
Direct
costs
Higher
compliance
costs and
increased
capital
requiremen
ts for some
groups.
Higher
compliance
costs and
increased
capital
requirement
s for some
groups.
Implementati
on costs for
supervisors
of
strengthened
and more
intensive
supervision
Extra cost for
the
supervisory
authorities in
the Member
states where
insurers have
significant
11
and groups Possible
extra costs
for
insurance
companies
conducting
cross
border
business.
of cross-
border
activities as
well as for
some groups.
cross-border
activities.
Intensified
supervision of
insurers’
compliance
with the
strengthened
and
harmonised
framework.
Indirect
costs
There is a risk
that increased
costs to
business and
administrations
will be (partly)
shifted to
customers
through increase
of insurance
premium.
PREFERRED OPTION: INTRODUCE MINIMUM HARMONISING RULES TO ENSURE THAT INSURANCE
FAILURES CAN BE BETTER AVERTED OR MANAGED IN AN ORDERLY MANNER
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Reducing the
likelihood of
insurance
failures
By clarifying the preventive powers and ensuring an
adequate degree of preparedness, on both the industry and
the supervisory sides, EU action would contribute to
increasing the likelihood that an insurer in distress would
effectively restore its financial position and continue to
perform its functions for society.
Policyholders and
beneficiaries, which
includes the business
sector in general, would
be the main recipients of
this benefit.
Improving
policyholder
protection
By reducing the likelihood of insurance failures and
implementing a framework that would ensure that important
insurance functions of a failing insurer continue to be
performed, EU action would contribute to a better protection
of policyholders.
Policyholders and
beneficiaries would be the
main recipients of this
benefit.
Foster cross-
border
cooperation and
coordination
during crisis
A more coordinated decision-making between different
public authorities and courts will contribute to reduce
inefficiency costs and preserve the value of the failing
entity.
Policyholders and
beneficiaries would be the
main recipients of this
benefit. However, many
insurers would also
benefit from a more level-
playing field in the
measures taken by
12
authorities to restore their
financial conditions or
resolve them.
Indirect benefits
Preservation of
financial
stability,
prevention of
systemic risks,
protection of the
real economy
and of public
funds
EU action would ensure the continuity of functions by
insurers whose disruption could harm financial stability
and/or the real economy and to protect public funds (by
limiting the risk of needing to “bail-out” failing insurers)
Society at large would be
the recipient of this
benefit, including
taxpayers.
Better
consideration of
the interests of
all affected
parties
EU action would ensure that the interests of all affected
Member States, including those where the parent company
is located as well as those where the subsidiaries and
branches of a failing group are located, are given due
consideration and are balanced appropriately during the
planning phase and when recovery and resolution measures
are taken. It would therefore address potential risks of
conflicts of interest for local supervisory and resolution
authorities to give priority to the protection of “local”
policyholders over other stakeholders
Policyholders and
beneficiaries would be the
main recipients of this
benefit.
II. Overview of costs – Preferred option
Citizens/Consum
ers
Businesses Administrations
One-
off
Recurre
nt
One-off Recurrent One-off Recurrent
Implemen
ting pre-
emptive
recovery
planning
Direct costs
Insurance
companies
would have to
develop pre-
emptive
recovery plans
which might
entail some
staff, IT and
consultant
costs, unless
they already
are subject to
such
requirements
on a local
basis. An
increased
synergy with
Insurance
companies
would have
to
periodically
review, adapt
and monitor
their pre-
emptive
recovery
plan as a part
of their
governance
framework.
NSAs would
have to set-up a
framework for
reviewing
recovery plans.
EIOPA estimated
the costs to lie
between 0.04 and
5 FTE depending
on the situation
of the concerned
NSA.
NSAs would
have to
review and
monitor
recovery
plans.
EIOPA
estimated the
on-going
costs related
to these
activities to
range
between 0.06
and 3 FTE.
13
existing
processes such
as the ORSA
could
contribute to
contain costs.
Indirect
costs
Implemen
ting
resolution
planning,
including
resolvabili
ty
assessmen
ts
Direct costs
Insurers
would have
to provide
information
that
resolution
authorities
would
require for
the purpose
of resolution
planning.
Resolution
authorities would
have to set-up a
dedicated
insurance
division that
would draft
resolution plans,
including
resolvability
assessments.
EIOPA estimated
that the overall
costs could range
between 0.3 and
9 FTE and
between EUR
21.000 and EUR
450.000
Resolution
authorities
would have
to maintain
resolution
plans and
perform
resolvability
assessments.
EIOPA
estimated
that the
associated
costs could
range
between 0.1
and 6 FTE
and between
EUR 21.000
and EUR
450.000.
Indirect
costs
In rare cases,
insurers may
be required
to implement
measures to
address any
identified
impediments
to resolution.
PREFERRED OPTION: INTRODUCE MINIMUM HARMONISING RULES TO PROTECT POLICYHOLDERS IN
THE EVENT OF AN INSURER’S FAILURE
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Improved
policyholde
r protection
As presented in Annex 5, the default of insurance
companies can expose policyholders to substantial
social and financial hardship due to the
discontinuation of their policies and the resulting
Eligible claimants, i.e. policyholders and
beneficiaries, which would be natural
persons and micro enterprises, would be
the major recipients of such direct
14
absence of protection. These effects would be
avoided by the implementation of an IGS. In
addition, a minimum harmonisation of IGS design
features across the EU would ensure a minimum
level of protection throughout the Single Market,
thereby ensuring a fair and equal treatment of all
policyholders, whatever their place of residence.
benefits.
Protection
of
taxpayers’
money
By transferring the burden of a failure back to the
private sector, the need to use taxpayers’
resources in the future in case of default of an
insurance undertaking is reduced. Estimations of
the benefits correspond to the degree of protection
offered to policyholders under various
assumptions. For further detail, please refer to
Annex 5. A rough estimate would be that the
introduction of an IGS would save around EUR
21 billion over 10 years of taxpayers’ money.
Taxpayers would be the main recipients
of such direct benefits. It should be noted
however that EU action on IGS will
affect taxpayers in Member States in
different ways, depending on whether
they are resident in a Member State
already having an IGS or not.
Indirect benefits
Improved
supervision,
in particular
for cross-
border
activities
Following EIOPA’s opinion, the implementation
of a home country system for insurance guarantee
schemes would incentivise supervisory authorities
to ensure a better oversight of authorised entities,
in particular when making use of their EU
passport and performing cross-border activities.
Policyholders and beneficiaries would be
the major recipients of such indirect
benefits as EU insurance companies
would be better supervised overall.
Improved
competition
in the
insurance
sector
across the
EU
The EU action would foster the level-playing field
and competitiveness in the insurance industry
across the EU. Competitive distortions between
domestic and non-domestic insurers will be
reduced, thereby contributing to a more efficient
Single Market for insurance. The harmonisation
of the geographical scope would also eliminate
overlaps of existing IGSs as well as the associated
costs.
The insurance industry would be the
main recipient of these indirect benefits
as they would be facing a more open and
fair competitive environment. As a
consequence, policyholders could also
enjoy the effects of increased
competition on their premiums and
benefit from increased choice from the
cross-border provision of services.
Better risk
managemen
t practices
and market
discipline
Through an appropriate design (see Annex 5), EU
action would create incentives for better risk
management practices and would foster market
discipline.
Policyholders and beneficiaries would be
the main recipients of such benefits as
insurance companies would have a
reduced risk profile overall and
consequently see a reduction in their
probabilities of default. This element
would also benefit insurance companies
as this would foster competitiveness on
sound grounds.
II. Overview of costs – Preferred option
Citizens/Consumers Businesses Administrations
One-
off
Recurrent One-
off
Recurrent One-off Recurre
nt
15
Introduce
a
minimum
harmonise
d
framewor
k for IGS
in all
Member
States
Direct
costs
Assuming pre-
funding, while the
costs are primarily
borne by insurance
companies, a
proportion of them
will likely be
passed on to
policyholders.
Therefore, a
maximum estimate
is that, during the
build-up phase
(assumed to be 10
years), the costs
could be around
EUR 2.33 for a
yearly premium of
EUR 1,000.
If we consider that
the costs are not
passed on to
policyholders, the
maximum cost
estimate for the
insurance industry
could be around
EUR 21 billion
over a transition
period of 10 years
for example. This
would represent a
yearly capital cost
of 0.12% of gross
written premiums.
Member States
where no IGS is
in place would
face set-up
costs. For
Member States
where an IGS is
already in place,
the costs would
depend on the
elements of
design and
scope that
would need to
be adapted.
Indirect
costs
Problem 5: Limited specific supervisory tools to address the potential build-
up of systemic risk in the insurance sector
PREFERRED OPTION: MAKE TARGETED AMENDMENTS TO PREVENT FINANCIAL STABILITY RISKS IN
THE INSURANCE SECTOR
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Prevention of
risks for the
financial stability
Improvement of the ability of
supervisors to prevent systemic risks
stemming from or affecting the
insurance sector
Recipients of this benefit are citizens and
businesses at large as well as national
governments (less likelihood to involve
taxpayer’s money to address the consequences
of a financial crisis).
Better
policyholder
protection
The requirement for insurers to
integrate macro-prudential
considerations in their underwriting
and investment activities would
reduce incentives for excessive risk-
taking behaviours.
Policyholders would be the main beneficiaries
Consistency with
the risk-based
nature of the
framework
Supervisory intervention on dividends
policies would be possible only when
justified by the application of risk-
based criteria.
Supervisors would continue to operate
according to their legal mandates
Reduced liquidity
risk which may
not be
Improvement of the ability of
supervisors to intervene in case of
liquidity vulnerabilities not addressed
In Solvency II there is no quantitative
requirement for liquidity risk as in the banking
sector. Those additional tools would ensure
16
appropriately
captured under
current rules
by insurers that no standardised liquidity metric is
specified in light of the variety of insurers’
business models.
Indirect benefits
Incentives for
improved risk
management by
insurers, beyond
capital
requirements
Enhanced tools for insurers to assess
own risks and their capacity to
determine market-wide risks
Policyholders would be among the
beneficiaries, but also insurers in the long run
which would implement strengthened risk
management system.
Minor impact on
insurers’
international
competitiveness.
New requirements are in line with the
international framework for systemic
risk (e.g. no capital buffers to prevent
the building up of possible future
risks).
Measures would be applied to improve
insurers’ risk management systems while not
implying tighter rules than their international
competitors. Therefore, insurers would be the
main recipients.
II. Overview of costs – Preferred option
Citizens/Consum
ers
Businesses Administrations
One-
off
Recurre
nt
One-off Recurrent One-off Recurrent
Integration
of macro-
prudential
considerati
ons in
insurers’
underwritin
g and
investment
activities
Direct
costs
Costs for
developing (or
reinforcing) new
underwriting or
risk management
systems
Costs for
maintaining
such new
systems
Costs
developing (or
reinforcing)
macro-
prudential
competences
and services to
assess macro-
prudential
risks in
insurance
Costs for
maintaining
such new
competence
s and
services
Indirec
t costs
Increased
complexity in the
risk management
requirements for
insurers
17
Enhanced
liquidity
risk
managemen
t by
insurers
Direct
costs
Costs for
developing (or
reinforcing) new
liquidity risk
management
systems for
insurers
According to
EIOPA, average
one-off cost would
be:
0.46 full-time
equivalent (FTE)
= 0.06% of total
employees
Costs for
maintaining
such new
systems
According to
EIOPA, average
annual costs
would be:
0.41 full-time
equivalent
(FTE)
= 0.05% of total
employees
Costs for
developing (or
reinforcing)
supervision of
liquidity
management
of insurers
Costs for
maintaining
such new
competence
Indirec
t costs
Electronically signed on 23/04/2021 11:13 (UTC+02) in accordance with article 11 of Commission Decision C(2020) 4482