COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the documents Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/138/EC as regards proportionality, quality of supervision, reporting, long-term guarantee measures, macro-prudential tools, sustainability risks, group and cross-border supervision and Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012

EN EN
EUROPEAN
COMMISSION
Brussels, 22.9.2021
SWD(2021) 260 final
PART 4/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the documents
Proposal for a Directive of the European Parliament and of the Council amending
Directive 2009/138/EC as regards proportionality, quality of supervision, reporting,
long-term guarantee measures, macro-prudential tools, sustainability risks, group and
cross-border supervision
and Proposal for a Directive of the European Parliament and of the Council establishing
a framework for the recovery and resolution of insurance and reinsurance undertakings
and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and
Regulations (EU) No 1094/2010 and (EU) No 648/2012
{COM(2021) 581 final} - {SEC(2021) 620 final} - {SWD(2021) 261 final}
Europaudvalget 2021
KOM (2021) 0581 - SWD-dokument
Offentligt
Page | 285
7. CONCLUSIONS
Based on the assessment presented in the previous sections, this section presents the
conclusions of the targeted evaluation of the Solvency II framework. Although it is
beyond the scope of the evaluation to provide any policy conclusions or follow-up action
to take, the section also highlights the main areas with potential to improve the
framework for the future, possibly in the process of the forthcoming review.
7.1. Conclusions on the Solvency II framework
Overall, the current Solvency II Directive and Delegated Regulation are broadly
effective and coherent, still highly relevant, neutral with respect to many digital
developments, and bring EU added value. Nonetheless, a number of issues in the
implementation of their principles (risk-based and market-based, proportionality), in the
supervisory convergence process, and the implementation of their requirements limit
their efficiency, and to a lesser extent their effectiveness, while some additional
dimensions are missing that could enhance their relevance in the current environment.
Specifically:
1. Effectiveness
The current risk-based, three-pillar approach of the Solvency II framework overall
achieved progress towards its general objectives: to increase the EU insurance market
integration, to enhance the protection of policyholders and beneficiaries, to improve
competitiveness of EU insurers as well as to foster growth and recovery. It has
significantly improved insurers’ risk management and internal governance and thereby
reduced the likelihood of an insurer to fail. However, some of the numerous measures
aiming to facilitate an enhanced risk management (such as the volatility adjustment
mechanism) could be refined, as they can give rise to insufficient or undesirable effects
depending on the economic situation and/or on the specificities of the national markets.
The framework has also fostered transparency and strengthened supervisory cooperation
and convergence, which in turn deepened the integration of the EU market and ensured a
better level-playing field for EU insurers. Although all these benefits are largely
acknowledged, the role of the insurers as institutional long-term investors or as “green”
investors is still seen as unsatisfyingly discreet. Reasons can be found in socio-economic
(policy) developments that were not foreseen at the time of the legislative process (such
as the persisting low-interest-rate environment that renders some provisions or
parameters outdated, insufficiently effective or even counter-effective). But they can also
be found to some extent in the design of the framework and in its “principle-based”
characteristic, which demands a very high level of clarity and cooperation to avoid legal
uncertainties and ensure sufficient supervisory convergence. The needs for
clarification evolve in turn with the implementation process, changing market conditions
and new/emerging issues.
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2. Efficiency
Due to the difficulties in obtaining reliable cost estimates and the lack of means to
quantify the general benefits of the Solvency II framework, it has not been possible to
carry out a quantitative assessment of its efficiency at EU level. The available evidence
on compliance costs, however, suggests that the proportionality objectives have not been
reached yet, and that insurers, the smaller ones in particular, spend significant financial
resources to comply with the current regulatory requirements. The reporting requirements
in particular seem to generate a cost that can appear disproportionate for smaller insurers,
both in terms of reaching the specific audiences and in terms of frequency. The
assessment identified a number of areas where the supervisory reporting
requirements could be better adapted to the size, nature and complexity of the
insurance companies. Therefore, the Solvency II framework is not as efficient as it
could be. Both updating and clarifying the application of the proportionality
principle could improve the general efficiency of the framework.
3. Relevance
The main objectives of the Solvency II framework – to deepen the integration of the EU
insurance market while ensuring sufficient policyholder protection and financial stability,
support the competitiveness of EU insurers and foster economic growth – remain highly
relevant. However, the economic and financial conditions faced by insurers and
reinsurers over the recent years and months (in particular in relation to interest rate risks
and market volatility) significantly differ from those during which the Solvency II
framework was designed. Therefore, some provisions and parameters now prove
outdated and lead to insufficient or undesired outcomes. Likewise, it may also raise
financial stability issues, and the existing macro-prudential tools already embedded in
the framework may not be fit to sufficiently allow addressing potential systemic risks
in the insurance sector. In particular, Solvency II does not provide a framework for the
coordinated resolution of insurers when the disorderly failures of an insurer would lead
to suboptimal outcomes for policyholders, the economy, financial stability and
potentially taxpayers. Similarly, there is no harmonised and coordinated approach of
safety nets in the form of insurance guarantee schemes that would protect
policyholders and beneficiaries in case of failure. Another newly emerged objective is
the role insurers are expected to play as institutional investors for a sustainable and green
recovery, and into long-term sustainable investments in general. The current
framework seems to lack the necessary prudential incentives for insurers to make
long-term sustainable investments as well as to manage and reflect climate and
environmental risks in their risk management. Reviewing the design of the capital
requirements in order to better reflect the current (and foreseeable) (natural and financial)
environment also highlights some additional objectives, or put even more emphasis on
existing ones. As to the horizontal digital issues that can concern the insurance market,
they are part of horizontal workstreams, and also subject to continued scrutiny and
ongoing work, in collaboration with the ESAs.
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4. Coherence
The interaction of the Solvency II framework with other parts of legislation is limited as
Solvency II is self-standing and by itself replacing a patchwork of 14 former Directives.
Further, while it focuses on the prudential dimension and policyholder protection by
ensuring that insurers have sufficient capital to meet their obligations, the Solvency II
Directive is very broad, encompassing also requirements for insurance groups. However,
the current provisions of the framework do not seem to be effective in a way that
corresponds to the objectives of the renewed Action Plan on the Capital Markets Union:
issues of insufficient volatility mitigation, impacting the insufficient effect of the
framework on long-term investment by the insurers. The same holds for “green
investment” and the European Green Deal.
From an international point of view, Solvency II is one of the most advanced standards at
international level, and several jurisdictions are in the process in incorporating (some of)
the European rules in national legislations. On the other hand, the current lack of
harmonised framework for coordination and management of crisis situations, including to
address potential systemic risk, is not consistent with the objectives set at international
level by the IAIS and the FSB.
5. EU added value
Overall, the Solvency II framework has clear added value by providing a harmonised and
sound prudential framework for insurance and reinsurance companies in the EU, merging
and harmonising the piece-wise regulation that existed before. Based on the risk profile
of individual firms, it promotes comparability, transparency and competitiveness.
Solvency II has significantly enhanced the protection of policyholders and beneficiaries,
by limiting the likelihood that their insurer fails, as well as increasing transparency on the
risks their insurer is facing. Under the coordination of EIOPA, Solvency II has also
facilitated supervisory convergence within the Union and contributed to the integration of
the Single Market for insurance services. However, the assessment suggests weaknesses
in supervisory convergence and cooperation which clearly hinder the effectiveness of the
framework in terms of competitiveness and integration of the EU market. It identified
such issues related to insufficient supervisory convergence and cooperation in particular
in the case of cross-border activities, and insufficient or unequal policyholder protection
in case of failure. In particular, there is no harmonised and coordinated approach of
safety nets in the form of insurance guarantee schemes that would protect
policyholders and beneficiaries in case of failure.
There is no question about the need for the EU-wide Solvency II framework.
Nonetheless, the assessment suggests that there is scope for improvement in a number of
areas, identified in the above-analysis and listed below. The feasibility of specific policy
actions, and the costs of any required changes, would be the subject of the back-to-back
impact assessment.
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7.2. Lessons learned
The following points summarise the lessons learned in this targeted evaluation in
terms of the main areas for improvement in the Solvency II framework. These need to be
understood within the above overall conclusion that the Solvency II framework is
broadly fit for purpose, and generally acknowledged by all stakeholders as a well-
functioning and robust regulatory framework. The risk-based framework has promoted
comparability, transparency, enhancing risk management practices and competitiveness.
It has therefore significantly enhanced the protection of policyholders and beneficiaries,
also providing strong incentives for insurers to better measure and manage their risks,
and to improve their internal governance. Under the coordination of EIOPA, Solvency II
has also facilitated supervisory convergence within the Union and contributed to the
integration of the Single Market for insurance services. The Framework has therefore
achieved progress in the different specific (and operational) objectives, thereby
contributing to the general objectives that had been set. The summary below focuses on
the identified areas for improvement.
Insufficient risk-sensitivity in the design of the capital requirements
 Solvency II is a “risk-based” framework. It defines capital requirements based on
quantitative evidence, setting the amount of capital resources that insurers have to set
aside in order for them to be able to cope with very extreme adverse events. Higher
capital requirements on investments are therefore applied to assets that are more
volatile and/or riskier. This risk-based principle has significantly improved insurers’
risk management practices.
 However, the framework needs to be regularly updated, so that it appropriately
captures all the risks that insurers are facing. It is a necessary condition to maintain
the reliability of the risk management as well as of the supervision, and to protect
policyholders effectively.
 Indeed, current Solvency II provisions and parameters may not reflect key recent
economic and financial trends.
 In particular, in the new economic environment characterised by compressed spreads
and low yields, the level of capital requirements using the standard formula may
sometimes underestimate the risks insurers are actually facing, in particular in
relation to interest rates; Underestimation of interest rate risk can also have negative
effect on investment behaviours and risk-taking activities by insurers, with potential
side effects on financial stability. The calibration of the interest rate risk sub-module
and the extrapolation of the risk-free interest rates are therefore not optimal.
 In addition, the current risk approach does not capture the possible risk differential
between “green” and “brown” assets.
Limited ability of the framework to mitigate short-term volatility of insurers’ solvency
position
 The Solvency II framework also relies on full market-based valuation of insurers’
assets and liabilities, which allows monitoring the impact of economic and financial
conditions on insurers’ solvency in real time and on an ongoing basis.
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 Solvency II comprises several regulatory tools aiming at mitigating the impact of
short-term market volatility, relying on this “market-consistent” valuation. Such
tools currently seem unable to avoid events of very volatile capital resources, in
particular under stressed situations.
 This remaining excessive short-term volatility poses a risk to the international
competitiveness of EU insurers, by generating more uncertainty. This uncertainty can
disincentivise insurers from further expanding their business and activities
internationally.
 It fosters short-termism in insurers’ underwriting and investment activities,
divesting from real assets supporting the European economy, and thereby hinders the
opportunities for the insurance market to fully play its role as institutional investor.
 It also makes it more costly for insurers to offer products with long-term guarantees,
incentivising a shift towards unit- or index-linked products where a large part of the
risk is transferred to policyholders.
 In addition, the current mechanism can also lead either to insufficient adjustment
or to unexpected stability or even improvements (so-called “overshooting”) in the
solvency position of insurers, as observed during the Covid-19 outbreak. Such
unintended situations raise supervisory challenges, as appropriate risk measurement
may be hindered under stressed situations.
Limited incentives for insurers to contribute to the long-term financing
 Solvency II has enforced a “risk-based” principle which has significantly improved
insurers’ risk management practices.
 With regard to market risks faced by insurers, the risk-based approach implies that
the definition of capital requirements on investments only depends on the relative
riskiness of each asset over a one-year time horizon, without taking into account
other EU political objectives.
 Consequently, the quantitative rules on long-term investments in general are seen
as very conservative by stakeholders and the framework has not sufficiently
contributed to foster long-termism in insurers’ investment decisions, which could
support the long-term funding of the real economy and the financing of the recovery
from the economic impact of the Covid-19 outbreak.
 The Commission introduced changes in 2019 via the Solvency II Delegated
Regulation, to ensure that investments in qualifying long-term equity are subject to a
preferential prudential treatment. Feedback received after more than a year of
implementation tend to establish that the conditions imposed for the application of
that preferential treatment may be either too complex or difficult to meet.
 Improvements could further facilitate long-term investment and incentivise
insurers to play their full part as institutional investor for the long-term financing of
the EU economy.
Insufficient contribution to the greening of the European economy
 The greening of the European economy concerns the insurers’ balance sheets on both
sides: assets and liabilities.
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 On the one hand, the risk-based approach implies that the definition of capital
requirements on investments only depends on the relative riskiness of each asset over
a one-year time horizon, without taking into account other EU political objectives.
Therefore, it also means that prudential rules do not take into account the
brown/green nature of investments. This may (at least partially) explain why
insurers’ investments in green assets remain a small share of their total investments,
even though insurers are key institutional investors for the financing of the green
transition, and despite the neutrality of the prudential framework with regard to
investment in assets or activities that are either environmentally-sustainable or
detrimental to the Commission’s objective of a climate-neutral continent.
 In addition, while Solvency II contains a general requirement on insurers to take
into account all risks in their risk management, the Directive does not name
explicitly climate and environmental risks (although other particular risk categories
are mentioned). Still, those risks would often materialise through other risk
categories, e.g. market or underwriting risk. This may result in a lack of clarity as
regards whether and where insurers are expected to reflect climate and environmental
risks and, as a consequence, in insufficient management of those risks by insurers.
 Improvements in this area could build on integrating sustainability considerations in
one or all of the three Solvency II pillars.
Insufficient proportionality of the current rules
 The assessment and feedback show that Solvency II is a sophisticated framework,
which provides good incentives for robust risk management by insurers. However, it
can also prove to be very complex, and its implementation generates significant
compliance costs. In some cases, these high compliance costs may outweigh the
benefits of the application of the framework for the smaller insurers, and there is a
general sentiment that proportionality is insufficiently implemented in the
supervisory process.
 The implementation of the framework also relies on a “proportionality principle”.
First, as regards the scope of firms that are subject to the Solvency II requirements,
current thresholds have not been updated yet, and may prove to be outdated.
 Second, the frameworks embeds an overarching principle of proportionality, which
supposedly ensures that both the requirements imposed to companies and the
intensity of supervisory activities by public authorities are commensurate to the
“nature, scale and complexity” of the risks of each firm. However, in practice, the
framework does not fully specify the nature of such “proportionate measures”.
This overarching principle has proven to be too “abstract”, resulting in legal
uncertainties and, at this stage, the implementation of proportionality has been
insufficient to effectively reduce the regulatory burden for smaller insurers.
 The supervisory reporting and disclosure in particular, being a pivotal component of
the Solvency II framework, has at the same time significantly enhanced transparency
and disclosure to all types of external stakeholders, and developed as a core
compliance cost, in particular for smaller insurers.
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 In addition, some characteristics of the reporting and disclosure provisions could
be improved, as they are sometimes reported as inadequate to the targeted audience
or seen as unnecessarily burdensome and frequent in regard to the expected use of the
information.
Regulatory and supervisory shortcomings in policyholder protection, including in the
event of an insurer’s failure
 The assessment shows that Solvency II has facilitated the integration of the Single
Market for insurance services by improving the level-playing field and supervisory
convergence. However, feedback and EIOPA’s reports also point to issues of
inconsistent application of some Solvency II provisions across the EU, and due to
legal uncertainties, several areas of the framework may not ensure a harmonised
implementation of the rules by insurers and supervisory authorities, in particular
in relation to the supervision of internal models, and to the supervision of insurance
groups.
 Indeed, EIOPA’s recently enhanced role may prove insufficient to ensure a high-
quality convergent supervision across Member States, and closing gaps may not
always be achieved solely through non-binding tools. In addition, the lack of
data sharing between supervisory authorities may hinder the effective
supervision of insurers operating on a cross-border basis. This can also affect
citizens’ trust in the single market and is detrimental to the Single Market for
insurance services.
 Recent failures of insurance companies, which operated mainly outside the country
where they were initially authorised, have indicated that there may be a need to
consider enhancements in quality, consistency and coordination of insurance
supervision in the EU, including in relation to cross-border business and group
supervision.
 The situation confirmed that policyholders are not consistently protected across
the European Union in the event that their insurer fails, in particular in the cross-
border context. National resolution regimes are mostly incomplete and
uncoordinated. Further, although a majority of Member States have set up an
insurance guarantee scheme for certain life or non-life policies, the approach they
have followed for the design diverges quite substantially from each other. It results in
a patchwork of the national insurance guarantee schemes, which are expected to
act as a safety net to pay claims in the event of the insurer’s insolvency. This can
leave some policyholders without any protection.
Limited specific supervisory tools to address the potential build-up of systemic risk in the
insurance sector
 Financial stability is a primary objective of the Solvency II framework.
 In line with most rules of the Solvency II Framework that are targeted to individual
insurers (so-called “micro-prudential supervision”), some existing measures
contribute to addressing potential systemic risk when it stems from large insurers.
Other provisions of the framework also aim at addressing systemic risk stemming
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from “pro-cyclical behaviours” by a large number of insurers, which may collectively
act as an amplifier of market downturns or of an exogenous shock.
 However, these tools provided for in the Solvency II Directive have been thought
through at a time where the insurance sector was still deemed protected from
“domino effects” such as those that have been observed in the banking sector.
Interconnectedness with other market participants, intersectoral impacts and
common risky (herding) behaviours among insurers may have been overlooked.
 There may be a need to further assess additional “dedicated” macro-prudential tools
that would be better fit for purpose and less narrow in terms of scope. They should
vest supervisory authorities with sufficient powers to allow an appropriate macro-
prudential supervision (i.e. a supervision of the whole insurance sector) and to
effectively prevent a build-up of systemic risk in the insurance sector.
 In particular, there may be no sufficient toolkit for public authorities to monitor,
avoid and handle failures of insurers, as regular insolvency procedure might be
unable to manage a failure in the EU insurance sector in an orderly fashion. From a
macro-prudential perspective, a patchwork of national recovery and resolution
regimes and insurance guarantee schemes is not beneficial to the integration of the
EU financial market.
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LIST OF REFERENCES
- Solvency II Framework:
o Directive: Directive 2009/138/EC of the European Parliament and of the Council of 25
November 2009 on the taking-up and pursuit of the business of Insurance and
Reinsurance (Solvency II), OJ L 335, 17.12.2009; consolidated version of 13 January
2019 (EUR-Lex link);
o Delegated Regulation: Commission Delegated Regulation (EU) 2015/35 of 10 October
2014 supplementing Directive 2009/138/EC of the European Parliament and of the
Council on the taking-up and pursuit of the business of Insurance and Reinsurance
(Solvency II) – (EUR-Lex link).
o Solvency II on the « Have your Say » page : https://ec.europa.eu/info/law/better-
regulation/have-your-say/initiatives/12461-Review-of-measures-on-taking-up-and-
pursuit-of-the-insurance-and-reinsurance-business-Solvency-II-
- COM:
o “Solvency II Impact Assessment Report”, 2007: Commission Staff Working Document -
Accompanying document to the Proposal for a Directive of the European Parliament and
of Council concerning life assurance on the taking-up and pursuit of the business of
Insurance and Reinsurance –{COM(2007) 361 final}{SEC(2007) 870} (EUR-Lex link)
o “Fitness Check of EU Supervisory Reporting Requirements [in Financial Services]”,
2019: Commission Staff Working Document – {SWD(2019) 403 final} (available at this
link)
- EIOPA’s Opinion on the 2020 Review of Solvency II (website):
o “EIOPA’s Advice”, 2020: Opinion on the 2020 Review of Solvency II (paper)
o EIOPA’s Background analysis, 2020 (paper)
- EIOPA’s supporting public consultations:
o on reporting and public disclosure
o on insurance guarantee schemes
o EIOPA’s Consultation Paper on the Opinion on the 2020 review of Solvency II, 2019
(webpage): a broader consultation on the other topics of the review (+ general feedback
statement on the outcome of the consultation and detailed resolution of stakeholders’
comments).
- COM and EIOPA reports on group supervision (under the Art. 242 mandate):
o “Report from the Commission to the European Parliament and the Council on the
application of Directive 2009/138/EC of the European Parliament and of the Council of
25 November 2009 on the taking and pursuit of the business of Insurance and
Reinsurance (Solvency II) with regard to group supervision and capital management
within a group of insurance or reinsurance undertakings”, 2019 (available at this link)
o EIOPA submitted two reports on the functioning of group supervision, supervisory
cooperation and capital management within insurance groups, in December 2017 and
December 2018: “Report to the European Commission on the Application of Group
Supervision under the Solvency II Directive” (EIOPA, 2017); “Report to the European
Commission on Group Supervision and Capital Management with a Group of Insurance
or Reinsurance Undertakings, and FoS and FoE under Solvency II” (EIOPA, 2018).
- EIOPA annual reports:
o Long-term guarantee measures: “Report on long-term guarantees measures and measures
on equity risk”; EIOPA published such reports at the end of 2016, 2017, 2018, 2019 and
2020.
o [consumer trends (if they have relevant context on products with long-term guarantees or
their alternatives, e.g. unit-linked and/or hybrids)]
o “Financial Stability Report” (latest – December 2020 – available at this link)
o “Risk Dashboard” (latest available at this link)
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- EIOPA, 2016: “Peer Review on freedom to provide services”, available at this link;
- EIOPA, 2017a: “Decision on the collaboration of the insurance supervisory authorities”,
available at this link;
- EIOPA, 2017b: “Opinion on the harmonisation of recovery and resolution frameworks”, available
at this link;
- EIOPA, 2018a: “Failures and near-misses in insurance”, available at this link;
- EIOPA, 2018b: “Peer Review of key functions”, available at this link;
- EIOPA, 2018c: “Insurance Stress Test Report”, available at this link;
- EIOPA, 2019: “Opinion on Sustainability within Solvency II”, available at this link;
- EIOPA, 2020a: “Report on the use of limitations and exemptions from reporting 2018 and Q1
2019”, available at this link;
- EIOPA, 2020b: “Results of the Peer Review on the Regular Supervisory Report (RSR)”, available
at this link;
- EIOPA, 2020c: “Impact of ultra-low yields on the insurance sector, including first effects of the
COVID-19 crisis”, available at this link;
- EIOPA, 2020d: “Peer Review on EIOPA’s Decision on the collaboration of the insurance
supervisory authorities”, available at this link;
- EIOPA, 2020e: “Discussion Paper: Methodology on potential inclusion of climate change in the
nat cat standard formula”, available at this link;
- EIOPA, 2020f: “Sensitivity analysis of climate-change related transition risks”, available at this
link;
- European Court of Auditors (ECA) - Special Report 29: “EIOPA made an important contribution
to supervision and stability in the insurance sector, but significant challenges remain”, 2018
(link);
- European Commission, DG FISMA, 2019: “Study on the drivers of investments in equity by
insurers and pension funds”; prepared by Deloitte Belgium and CEPS, available at this link ;
- European Commission, DG FISMA, 2020: “Study on the costs of compliance for the financial
sector”; written by ICF and CEPS, available at this link ;
- Fitness Check on the EU Framework for public reporting by Companies;
- GDV (Gesamtverband der Deutschen Versicherungswirtschaft), Official statement/Survey, 2019:
“25.02.2019 Regulierung und Aufsicht kompakt” , available at this link;
- KPMG study – 25 February 2020 (see IGS Annex 5)
- COM:
o Commission Communication: Action Plan on Building a Capital Markets Union (EUR-
Lex link)
o Commission Communication: European Green Deal (EUR-Lex link)
o Commission Communication: Stepping up Europe’s 2030 climate ambition (EUR-Lex
link)
o Commission Communication: A Capital Markets Union for people and businesses-new
action plan (EUR-Lex link)
o “Taxonomy”: technical screening criteria for the identification of sustainable economic
activities as adopted under Regulation (EU) 2020/852 of the European Parliament and of
the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable
investment, and amending Regulation (EU) 2019/2088, OJ L 198, 22.6.2020, p. 13 (EUR-
Lex link)


EN EN
EUROPEAN
COMMISSION
Brussels, 22.9.2021
SWD(2021) 260 final
PART 3/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the documents
Proposal for a Directive of the European Parliament and of the Council amending
Directive 2009/138/EC as regards proportionality, quality of supervision, reporting,
long-term guarantee measures, macro-prudential tools, sustainability risks, group and
cross-border supervision
and Proposal for a Directive of the European Parliament and of the Council establishing
a framework for the recovery and resolution of insurance and reinsurance undertakings
and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and
Regulations (EU) No 1094/2010 and (EU) No 648/2012
{COM(2021) 581 final} - {SEC(2021) 620 final} - {SWD(2021) 261 final}
Europaudvalget 2021
KOM (2021) 0581 - SWD-dokument
Offentligt
Page | 227
6. ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONS
6.1. Effectiveness
Summary assessment:
Overall, the current Solvency II Directive and Delegated Regulation have been broadly
effective and achieved progress towards their overarching founding objectives, which
were to facilitate the development of the Single Market in insurance services whilst
securing an adequate level of policyholder protection. Nonetheless, some provisions or
parameters may be outdated, and a number of issues have been identified in the
implementation of their principles, in the adaptation to changing market conditions and
in the supervisory convergence process, which limit their effectiveness. In particular,
the volatility adjustment mechanism and the incentives for insurers’ long-term
investments have been identified as insufficient to achieve the objectives.
Figure 6.1-1: Effectiveness - General and Specific objectives - Summary
 Has the Directive been overall effective in reaching its general objectives, i.e. to
increase the EU insurance market integration, to enhance the protection of
policyholders and beneficiaries and improve competitiveness of EU insurers?
Three specific objectives had been set in order to facilitate these general ones: (i) to improve
risk management, (ii) to increase transparency and (iii) to advance supervisory convergence
and cooperation. When the framework is effective with regard to these objectives, it will
logically also contribute to the general objectives. The degree of achievement of the general
objectives is therefore assessed through the following:
6.1.1. To what extent has the Framework improved the risk management of
EU insurers?
Solvency II incentives for better risk management – achievements in solvency position
and reduced likelihood to fail
Since 2016 when it entered into application, the Solvency II Directive has provided a
harmonised prudential framework for insurance and reinsurance companies in the EEA,
merging and harmonising the piece-wise regulation that existed before. Applying common
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rules in a harmonised framework (e.g. for the valuation of technical liabilities or reporting
purposes) facilitated a level-playing field for the insurers and provided a better comparability
for both policyholders and investors. In turn, it increased transparency and improved
supervisory convergence, which contributed to a deeper integration of the EU insurance
market.
To achieve progress in its primary objectives to enhance the protection of policyholders and
beneficiaries and improve competitiveness of EU insurers required to reduce the likelihood of
an insurer to fail (and to increase trust into the insurance companies).1
And reducing the
likelihood of an insurer to fail could not be achieved without sound risk management.
Therefore, a key specific objective has been defined, i.e. to improve risk management
practices among insurers.
Solvency II has improved the risk management of insurance companies thanks to the design
of the framework, which includes several elements which are contributing to their better risk
management. First, it is built on an overall risk-based approach (see section 2 - Description).
The newly “risk-based” Solvency II framework has aimed at insurance companies being
subject to effective solvency requirements based on the actual risks they are facing.2,3
In
addition, quantitative requirements in the first pillar are further strengthened by the
provisions in the other pillars, including measures resulting from supervisors’ risk assessment
and insurers’ own risk assessment and stress testing (pillar 2). Transparency rules in pillar 3
require further discipline to assess risks from insurers. Therefore insurers calculate their
technical provisions based on the actual risks they face. As a result, the level of capital
resources available to the insurer (own funds), measured as the “solvency ratio”, goes up
reflecting this better risk management.
With Solvency II, this “solvency ratio” has actually increased, which reflects the insurers’
achieved success in improving risk management and related reliable financial health. This,
even when taking account of the transitional measures meant to allow a smoother phasing out
of earlier-written business. It is further detailed in the following paragraphs.
The new risk-based approach was accompanied with transitional provisions (for a period of
maximum 16 years, i.e. ending on 1 January 2032),4
aiming to allow a smooth phasing out of
the business written before the entry into application of Solvency II. The objective is to
ensure a smooth transition to the risk-based Solvency II regime for contracts concluded under
the previous solvency regime, which might otherwise risk disturbing the insurance market.
For pillar 1 in particular, the reasoning is the following. The risk-based nature of Solvency II
1
As an illustration, a review published by KPMG in February 2020 on “insurance undertakings insolvencies and
business transfers in Europe” concluded on the positive effects of prudential regulations introduced in
Europe since 2001. In particular, the study noted that failures after 2001 have significantly reduced in
numbers and concerned smaller companies, thereby creating less impact and affecting fewer creditors.
2
The Solvency II structure and core functioning are explained in section 2: Description of the intervention.
3
The approach under Solvency I was static. The solvency margin was calculated formalistically taking into
account only the liabilities of the insurance company. Two insurers A and B with the same contracts and the
same liability structure would have the same solvency margin. Insurer A could keep all his assets in cash,
and insurer B could invest all his assets into risky assets. This would not have had any impact on the
solvency margin, i.e. the solvency capital requirement under Solvency I.
4
These transitional provisions were introduced via Omnibus II Directive.
Page | 229
against the background of low interest rates has a particular5
impact on liabilities with a long
duration, i.e. typically the liabilities of products with long-term guarantees. As the transitional
measures are limited in time6
, linearly phasing out and applicable for insurance contracts
concluded before the entry into application of Solvency II, insurance companies are not
penalised for having offered products with long-term guarantees in the past.
The most widely used transitional measures are those for the calculation of technical
provisions (TTP)7
. The application of these transitional measures lead to a lower valuation of
liabilities, and therefore of technical provisions. Ceteris paribus, it leads to an increase in the
SCR ratio. In total, in the EEA (without the UK) 136 insurance companies are using the
TTP.8
These companies have a market share in technical provisions of 19 %. Without taking
into account the TTP measures, the SCR ratio in the EEA decreases from 259 % to 247 %.
While at first glance a 19 % market share on EEA level could suggest a “big impact” on the
market, the decrease to a 247% SCR ratio seems to be negligible. However, the figures must
not be interpreted isolated. If one considers only the insurance companies using the TTP
measure, by removing the TTP their financial position would decrease the SCR ratio from
318% to 196%9
at EEA level.
Therefore, to have a holistic picture of the impact of the transitional measures, one needs to
assess: i) the national market share of companies using the TTF measures; ii) the impact itself
the measures have on the SCR ratio; and iii) the level of the SCR ratio without the TTF
measures. In Norway for example, insurers using the TTF measures represent a market share
of around 80 % of technical provisions. However, the impact of removing the TTF measures
on these insurance companies is a decrease of the SCR ratio from 254 % to 231 %. Which
also means that the level of the SCR ratio despite the removal of the TTF measure is still at
231 %.
The number of companies not complying with the SCR without the TTP measures declined
from 35 (beginning 2016) to 16 (end 2019)10
. In the same period, the missing amount of
eligible own funds to comply with the SCR without the transitional measures declined from
5.26 to 1.95 billion EUR. And the SCR ratio (without TTP measures) of the companies using
the TTP measures rose from 124 % to 196 % in that period. These figures and statements
from the supervisory authorities11
suggest that the period during the application of the
transitional measures was indeed used by the insurers concerned to facilitate the compliance
5
The low interest environment implies that discounting with market-based rates instead of a (higher) flat risk
curve impacts liabilities of longer durations in particular, as the discounting is done for each year of the
expected cash flow (see also section 2: Description of the intervention).
6
They are designed to phase out in a linear way over the transitional period of 16 years.
7
The transitional provisions consist of transitional measures for the calculation of the risk-free rate (TRFR) and
of measures for the calculation of technical provisions (TTP). In brief, the TRFR allow to use the risk-free
rate used under Solvency I while the TTP allow to calculate the technical provisions according to Solvency I.
In 2019, only 5 companies, in 3 countries, are using the TRFR. Thus, we will assess the impact of the use of
TTPs only, as the same logic applies for TRFR.
8
Data from EIOPA (2020), “LTG Report” (see list of ref.).
9
These figures are mainly driven by the German market, as 59 of the 136 insurance companies are from
Germany. The share of the German companies using the TTP measures in the EEA is 8 %.
10
The overall number of companies using the transitional measures remained stable after 2016 and varied
between 159 and 169 until the end of 2018.
11
See also the LTG Reports by EIOPA (2018, 2019 and 2020).
Page | 230
with new requirements during the first years of application. Thus, the phasing out is a
success.
Thus, with (and also mostly without) the transitional measures, the “solvency ratio”, is an
indication of the insurers’ achieved success in improving risk management and related
reliable financial health. Over the period 2016 to 2019, insurance companies’ average
solvency ratio has steadily increased and was in all years of that period more than twice as
high as the level required by the Directive. Further, as reported in EIOPA’s LTG Report
2020, the total number of companies breaching the SCR had decreased from 25 on 31
December 2017 to 17 on 31 December 2018. Without consideration of the UK, there were 12
on 31 December 2019, representing a market share of 0.01% (both in terms of gross written
premiums and in terms of technical provisions). 12
Figure 6.1-2 Average solvency ratio for EEA insurers13
Sources: EIOPA (2020) - Report on long-term guarantees measures and measures on equity risk (page 177) and Technical
information relating to risk-free interest rate (RFR) term structures is used for the calculation of the technical provisions for
(re)insurance obligations (link)
The fact that solvency ratios are so often well-above the 100% “regulated target” reflects the
fact that insurers have actually integrated the requirements of all three “pillars” in their own
target. Indeed, as explained in section 2 - Description of the intervention - capital
requirements are only one dimension, though probably the most visible. Pillar 2 requires an
ORSA, where the insurer undertakes its own “stress testing”, integrating all foreseeable risks
such as a volatile and uncertain economic outlook. The solvency ratios above 100% imply
that insurers’ own risk appetite sets levels of available capital which are more than sufficient
to meet the quantitative requirements at a given point in time, but also in a forward-looking
manner. Further, the reporting and disclosure requirements in pillar 3 fostering transparency,
insurers also have to integrate into their own risk appetite their stakeholders’ expectations
12
Split as follows according to their type: 5 non-life insurance undertakings, 1 life insurance undertakings, 2
undertaking pursuing both life and non-life insurance activity and 4 reinsurance undertakings.
13
In addition to average solvency ratios, the chart also plots the level of the volatility adjustment (VA) for the
Euro on the right axis. While other LTG measures have shown a more stable impact over time, the impact of
the volatility adjustment has varied in accordance with moves in the level of the volatility adjustment. To
this end, the differences from year to year in the height of the blue bars are to a large degree driven by the
movements of the volatility adjustments. The volatility adjustment for the Euro has the largest impact,
because most of EEA insurers’ liabilities are denominated in that currency.
0
5
10
15
20
25
30
0%
50%
100%
150%
200%
250%
300%
2016 2017 2018 2019
SCR ratio without LTG measures Impact of LTG measures Euro VA (bps, right axis)
Page | 231
(e.g. rating agencies), whose norm can increase with the actual ratios increasing. In brief, it
shows how Solvency II strengthened not only insurers’ resilience to shocks but also the
robustness of their risk management.
Likewise, even with the losses stemming from the market turmoil triggered by the Covid-19
outbreak, insurers’ capital resources remain on average more than twice as high as what
corresponds to the capital requirements of the legislation. The graph below illustrates the
decrease between the end of 2019 and the first quarter of 2020: the average ratio of insurers’
capital resources over capital requirements decreased by 18 percentage points to 243%,
representing a cumulative loss in excess capital of approximately EUR 131 billion. In the
third quarter of 2020 the ratio had gone up to 246%.
Figure 6.1-3: Average solvency ratio per country
Source: EIOPA Statistics (own funds); the ratio is calculated by country as national aggregates of own funds to solvency
capital requirements.
Conclusion: Based on all the consultation activities, reports and regular exchanges
between the Commission services and the stakeholders, the good solvency performance of
the sector and the decreased likelihood to fail are acknowledged, reflecting improved risk
management practices. There are indeed numerous measures provided by the Solvency II
framework to facilitate an enhanced risk management through harmonised and more accurate
measurement of technical provisions. However, some of them have been identified as
ineffective, or can give rise to diverse (sometimes problematic) effects depending on the
economic situation and/or on the specificities of the national markets. To illustrate this, the
volatility adjustment and the regulatory curve are detailed in the next subsections.
The volatility adjustment: insufficient mitigation, under- and overshooting
The Solvency II framework aims at providing a comprehensive set of measures that
should allow insurers to operate an optimal risk management. The possibility to limit the
impact of excessive volatility is part of these measures. Solvency II therefore includes several
Page | 232
optional regulatory mechanisms (so-called “long-term guarantee measures and measures on
equity risk”).14
They are aimed at mitigating the impact of short-term market turmoil on
insurers’ solvency position. The volatility adjustment might be subject to prior approval by
the NSA. In addition, there is a legal mandate set out in the Directive to review those
measures (long-term guarantee measures and measures on equity risk).Indeed, reliance on
market values, given that there are occasional high market price fluctuations, may imply high
short-term volatility in insurers’ assets – the value of which evolves with financial market
movements – and liabilities (for instance, when asset values and asset returns decline, the cost
for an insurer of providing a high guaranteed rate on a life insurance product increases
significantly), hence in their solvency position. Limiting the impact of short-term volatility on
insurers’ solvency positions is therefore essential, in particular for life insurers, in order to
allow them to conduct their business with the appropriate long-term perspective. Otherwise,
they might reduce the continued supply of long-term insurance products with guaranteed
minimum returns, and the long-term financing of the real economy. Mitigating short-term
volatility also reduces the incentives for procyclical behaviour and the risk of fire sales which
raise financial instability risks.15
Further, excessive volatility in solvency ratios can also
affect insurers’ competitiveness, by generating more uncertainty. This uncertainty can
restrain insurers from further expanding their business and activities internationally.
By the end of 2019, 25 % of insurance companies in 22 countries were using at least one of
the existing “long-term guarantee measures”, which represented 75% of the insurers’ total
amount of liabilities towards policyholders in the European market. However, nine countries
have no insurer using such measures16
. The most widely used “long-term guarantee measure”
is precisely the “volatility adjustment”17
. In 2019, 631 companies in 21 Member States were
using it, i.e. 26% of insurance companies, holding 79% of all technical provisions in the
EEA, as detailed in
14
The LTG measures are: the extrapolation of risk-free interest rates, the matching adjustment, the volatility
adjustment, the extension of the recovery period in case of non-compliance with the Solvency Capital
Requirement, the transitional measure on the risk-free interest rates and the transitional measure on technical
provisions. The equity risk measures are the application of a symmetric adjustment mechanism to the equity
risk charge and the duration-based equity risk sub-module. See also EIOPA’s LTG Reports.
15
22% of respondents (36% if we exclude those who did not have an opinion) to the Commission’s public
consultation consider that the current Solvency II framework does not promote procyclical behaviours.
Similar percentages can be observed among both insurance stakeholders and consumers/citizens/NGOs.
Regarding public authorities, views are more balanced as 50% of them believe that the framework
appropriately mitigates volatility and prevents procyclical behaviour.
16
Estonia, Croatia, Island, Lithuania, Latvia, Malta, Poland, Romania and Slovenia. Source: Report on long-
term guarantees measures and measures on equity risk (2019) – EIOPA.
17
It consists in an adjustment to the regulatory risk free interest rate curves used to value technical provisions,
which aims at mitigating the impact of both short-term spread increases for a given currency (so-called
“currency volatility adjustment”) and national-specific spread crises in a given country (so-called “country
volatility adjustment”) on insurers’ capital resources. The volatility adjustment is therefore expected to avoid
excessive volatility in insurers’ solvency positions in times of spread markets turbulence.
Page | 233
Figure 6.1-4 and Figure 6.1-5. This adjustment is mainly used for the valuation of life
insurance obligations.
Figure 6.1-4: Volatility adjustment: number of users per EEA country – 2019
Source: LTG Report, EIOPA 2020.
Figure 6.1-5: Use of volatility adjustment – National market shares – 2019
Source: LTG Report, EIOPA 2020.
Note: the national market share of the insurer is expressed in technical provisions amounts.
Page | 234
It seems however that the currently designed volatility adjustment may not be sufficient, as
the Covid-19 outbreak recently illustrated. The crisis has generated heightened volatility in
financial markets, drops in stock markets, and rises in spreads. Solvency positions proved
then to be very volatile over very short periods, in particular during March 2020, thus
illustrating shortcomings in the ability of the existing regulatory tools in limiting the impact
of artificial market turmoil on insurers’ capital resources. As mentioned above, when the
short-term volatility in insurers’ solvency becomes excessively high, it fosters short-termism
in insurers’ underwriting and investment activities, and is claimed to drive insurers to shift a
large part of the risk to policyholders (via the distribution of unit- or index-linked products),
and to divest from real assets supporting the European economy. 38 of the 73 participants to
the public consultation confirm this concern, while only 11 participants reply that Solvency II
appropriately mitigates the impact of short-term market volatility.
Illustrating this issue, a big national market has reported the volatility in the average solvency
position of a representative sample of its life insurance market (including application of the
VA). Starting from a ratio of eligible own funds to capital requirements of around 210% on
31 December 2019, the ratio had decreased by 106 pp until 16 March 2020, then increasing
again by 57 pp by the end of the same month, i.e. 31 March 2020. Which meant an overall
decrease of only 49 pp.
In addition, there is also a country-specific component of the volatility adjustment. It is
introduced to take into account the possible “home bias” insurers’ bond portfolio is subject
to. It means that insurers often invest a lot (or mainly) in bonds of their home Member State.
As shown on Figure 6.1-6 below, for 12 Members States more than half the amounts invested
in government and/or corporate bonds are “home investments”. For some of them, the
proportion goes up over 80%.
Figure 6.1-6: Home bias - Q2 2020
Source: EIOPA Statistics (Asset exposures - Q2 2020), Commission Services.
When such a Member State is subject to more volatile spread movements than the rest of the
Euro Area, the sole “currency volatility adjustment” (i.e. the one applicable to all euro-
0%
20%
40%
60%
80%
100%
EE
IE
LU
CY
MT
FI
LV
NL
SI
AT
PT
BG
LT
BE
DE
EL
SK
FR
IT
DK
ES
CZ
SE
HR
RO
PL
HU
Share of government "home" bonds Share of both gvmt and corp. "home" bonds
Page | 235
denominated liabilities) is not sufficient in mitigating spread volatility. In other words, the
current conditions for the activation of the country-specific component18
of the volatility
adjustment may create “cliff effects” in periods where the spreads of a single Member State
fluctuate around the trigger point and alternate between situations of activation and non-
activation of the component. It is especially true for insurers located in Southern countries
with higher spreads. This cliff effect is illustrated in Figure 6.1-7 for the fluctuation of the
volatility adjustment throughout the year 2018. Movements in the yields on Italian sovereign
debt caused the country component to be activated in three out of 12 months during that year.
There were significant jumps in the level of the VA when the country component was
activated or deactivated. The non-activation of the country component can lead to
undershooting effects in countries where the spreads on investments increase to a larger
extent than the spreads on the currency reference portfolio19
, which may also prevent the
measure to achieve its intended objective of a countercyclical measure.
Figure 6.1-7: Levels of the 10-year yield on Italian sovereign debt and fluctuation of the Italian VA in
2018
Sources: EIOPA (Technical information relating to risk-free interest rate (RFR) term structures is used for the calculation of
the technical provisions for (re)insurance obligations and ECB (long-term interest rate for convergence purposes, Italy).
On the other hand, under certain conditions, the current volatility adjustment mechanism can
also lead to unexpected stability or even improvements in the solvency position of other
insurers, during crises such as the Covid-19 outbreak. Indeed the effect of the volatility
adjustment can be so strong that it overcompensates all other losses that insurers have
18
The country component is activated whenever the country risk-corrected spread (computed on the basis of a
country reference portfolio) is higher than 85 bps and is at least twice the currency risk-corrected spread
(computed on the basis of the currency reference portfolio). When those two conditions are met the size of
the volatility adjustment is increased by the difference between the risk-corrected spread calculated at
national level and twice the risk corrected spread calculated at currency level.
19
According to analysis performed by the Italian Association of Insurers, fluctuations around the trigger point
of the country component have been observed in Italy in the period between May and June 2018.
0
50
100
150
200
250
300
350
400
0
10
20
30
40
50
60
70
Country-increase for IT
Euro volatility adjustment (bps, right axis)
IT - 10 year yield on sovereign debt (bps, left axis)
Page | 236
incurred, leading to an actual improvement in the solvency position. Such effects raise
supervisory challenges, as appropriate risk measurement may be hindered under stressed
situations. In practice, some insurance groups in at least three different Member States (the
Netherlands, Belgium and Finland) have reported that they experienced an increase in their
solvency position (measured as the ratio of capital resources to capital requirements) of
between 10 and 41 percentage points from 31 December 2019 to 31 March 2020 – a period
over which the deteriorated market conditions was expected to lead to a deterioration in
solvency positions. According to EIOPA, during the first quarter of 2020, 10% of insurers
companies participating to the data collection exercise (the sample represented € 4.030 billion
of liabilities towards policyholders) experienced such a situation.
What is the mechanism leading to this “overshooting”? Many external and internal factors
have an impact on the solvency position of insurance companies. However, regulatory risk-
free interest rates and, where applied, the volatility adjustment (VA) are an important driver
of the solvency positions. The VA reflects the movements of risk-adjusted credit spreads of
the average investments of insurers with liabilities in the relevant currency. An individual
insurer may have investments that are very different from the average for a given currency.
An insurer’s liabilities may also react to changes in interest rates in a weaker or stronger way
than the average investments to changes in credit spreads. Those aspects may lead to
discrepancies between a particular insurer’s loss on the investment portfolio caused by the
spread widening from December 2019 to March 2020 and the decrease of the technical
provisions over the same period. In the examples referred to above, it is likely that the
insurance groups apply the VA and were investing in assets less affected by spread widening
than the average fixed income portfolio (the one determining the level of the VA for the Euro
Area). The volatility adjustment might therefore have translated into a reduction of the
technical provisions that was larger than the loss on the investments. The combination of both
effects would be an increase in the regulatory own funds and, thus, the solvency position.
Finally, over the recent years, insurers in some countries have favoured the supply of
insurance products where the investment risk is shifted to policyholders instead of traditional
life insurance products with guarantees. As shown on Figure 6.1-8, they do this via the
distribution of unit-linked or index-linked products, with prospects of potential higher returns
coupled with a higher risk for policyholders, who are often not fully aware of the risks
entailed. Some stakeholders claim that the Solvency II framework, with an excessive
volatility, has incentivized this risk shifting. Still, while excessive volatility is an observed
weakness of the framework (as just detailed), it is difficult to show a direct causality to the
product shifting. And even among insurers that responded to the Consultation, only about
16% fully confirm this statement, while about 77% reply that the framework has incentivised
the shift but is not the most important driver.
Page | 237
Figure 6.1-8: Trends of unit-linked investments across the EU for the period 2005-2020Q3
Source: EIOPA Solvency I and Solvency II statistics, Deloitte-CEPS analysis, Commission analysis.
Note: The ten most important EU Member States in terms of amounts are shown separately, covering 95.8% of
the total over all EU Member States at 2018Q1. The remaining EU Member States are clustered. Note that in
2015 there is a missing value for Luxembourg.
In addition, when looking at the evolution of the share of unit-linked business in terms of
gross written premiums (GWP), over the period of 2017 to 2019 it does not allow for any
strong conclusion, as there is no sufficient evidence to identify a clear trend. The share of
unit-linked investments remained rather stable over this recent period. The overview of
Member States (see Figure 6.1-10) also shows that there are substantial national differences
regarding the share of unit-linked business so that Solvency II does not appear as the main
driver.
Figure 6.1-9: GWP - Unit-linked share trend
0,0%
2,5%
5,0%
7,5%
10,0%
12,5%
15,0%
17,5%
20,0%
22,5%
25,0%
27,5%
30,0%
32,5%
35,0%
37,5%
40,0%
42,5%
45,0%
47,5%
50,0%
0
150.000
300.000
450.000
600.000
750.000
900.000
1.050.000
1.200.000
1.350.000
1.500.000
1.650.000
1.800.000
1.950.000
2.100.000
2.250.000
2.400.000
2.550.000
2.700.000
2.850.000
3.000.000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Unit-linked
investments
(in
%
of
total
investments)
Unit-linked
investments
(in
Mio
EUR)
Other
FI
SE
LU
IE
DK
NL
IT
DE
FR
GB
% EU
Page | 238
Source: EIOPA (2020), LTG Report, p.25
Figure 6.1-10: Unit-linked as share of GWP-Life business across countries
Source: EIOPA Statistics (QRS). Data on Denmark is missing.
Conclusion: The most widely used “long-term guarantee measure”, namely the
volatility adjustment, does not sufficiently/appropriately mitigate short-term volatility, still
leaving room for short-termism in insurers’ underwriting and investment activities or, when
overshooting, for unexpected supervisory challenges.
Regulatory curve: not adapted to the current low interest rate environment
Insurers have to value their liabilities towards policyholders prudently. As described
in Section 2 – Description of the intervention, to this end, Solvency II requires that they make
projections of all future cash in- and out-flows that they will have to pay and receive, and to
calculate the “present value” (i.e. to discount those cash-flows) using regulatory “risk-free
Page | 239
interest rate curves” (per currency) that are in general adopted by the Commission on a
quarterly basis20
.
According to Solvency II, regulatory risk free interest rates should generally be based on
market data. However, insurance contracts can cover obligations to pay benefits very far into
the future, and in the case of life-long benefits they can imply cash-flows up to more than 100
years into the future. But market data is not available for such long maturities. Proxies have
to be used, hindering the adequacy of the liabilities valuation, and therefore leading to
misestimating the insurers’ solvency position. For the case of the euro, the regulatory risk-
free interest rates are based on euro-denominated interest rate swap rates up to a maturity of
20 years (the so-called “last liquid point”). As indicated in Figure 6.1-11, beyond 20 years
regulatory interest rates are “extrapolated” and have to converge towards a so-called
“ultimate forward rate” (UFR) which was set at 3.75% during 2020 and is currently set at
3.6% (since 1 January 2021). This means that market information beyond maturities of 20
years merely influence the annual updates of the UFR and thus the UFR itself is almost
completely ignored when defining the rates used to value long-term liabilities.
Figure 6.1-11: Extrapolation of risk-free interest rates for the Euro (31/12/2020)
Source: EIOPA (Technical information relating to RFR term structures is used for the calculation of the technical provisions
for (re)insurance obligations (lien).
In practice, and in particular in the current low-yield environment, there may be a certain
inconsistency between the regulatory rates beyond a maturity of 20 years as calculated
according to the current Solvency II rules and the actual market rates for equivalent
maturities. For instance, for maturities above 33 years, the regulatory risk-free interest rates
were exceeding the actual yield on 100-year maturity Austrian sovereign bonds issued in
June (0.85%), with Austria being rated slightly below the highest sovereign rating categories.
Furthermore, market interest rates can be observed via (fixed to float) interest rate swaps.
Figure 6.1-12 compares such market rates with extrapolated rates for data pertaining to the
year-end of 2018 and shows that market rates can be at levels significantly below the
extrapolated rates.
Figure 6.1-12: Comparison of extrapolated interest rates and market rates derived from interest rate swaps
(Euro, 31/12/2018)
20
According to article 77e (2) of the Solvency II Directive the Commission may adopt implementing acts
setting out these curves. Although this is not an obligation but only an option for the Commission, the
Commission adopts these implementing acts regularly.
-1,0%
1,0%
3,0%
0 5 10 15 20 25 30 35 40 45 50 55 60
risk-free rates (Euro - 31/12/2020)
ultimate forward rate
last liquid point
Page | 240
Source: EIOPA (Technical information relating to risk-free interest rate (RFR) term structures is used for the calculation of
the technical provisions for (re)insurance obligations) and Information request to insurance undertakings from the EEA in
the context of the Long-Term Guarantees Report 2019.
In brief, in the current low interest rate environment, because market information for
maturities above 20 years are currently not taken into account, the regulatory interest rate
curve used to value insurance liabilities can lead to underestimating insurers’ liabilities and
overestimation of their solvency position. If this is the case, it would limit prudential
incentives and might even imply that insurers under-reserve for their future obligations,
which would put at risk their ability to pay policyholders’ claims over the long term.
Conclusion: The assessment shows how the framework works to enhance risk
management practices of the insurers, and limit the likelihood that they fail. Indeed,
achieving both the competition and policyholders’ protection objectives requires that
insurance companies are subject to effective solvency requirements based on the actual risks
they are facing. Beside the “risk-based” principle, the framework also relies on full market-
based valuation of insurers’ assets and liabilities, which allows monitoring the impact of
economic and financial conditions on insurers’ solvency in real time and on an ongoing basis.
This double principle (risk-based/market-based) has fostered better risk management
behaviours and outcomes, as reflected in the high level of solvency ratios of insurers.
However, some of the numerous measures aiming to facilitate this enhanced risk
management have been identified as ineffective, or give rise to diverse effects depending on
the economic situation and/or on the specificities of the national markets.
6.1.2. To what extent has the framework increased transparency?
Transparency needs both the harmonisation of calculation methods, solvency
standards and supervisory methods, and the access to harmonised data. The section above has
shown that the Solvency II framework has fostered better risk management behaviours, in
particular by harmonising the valuation methods and therefore the information reported to the
supervisory authorities. The section 6.1.3 below assesses the development of supervisory
convergence.
As regards the information to the supervisors and in particular to the policyholders, the
Solvency II framework, pillar 3, requires the yearly publication of a “solvency and financial
conditions report” (SFCR), which did not exist before. The SFCR is “codified” to a certain
extent with several elements which are fully standardized (in particular quantitative data)
-0,5%
0,5%
1,5%
2,5%
3,5%
4,5%
0 10 20 30 40 50 60
regulatory rates (Euro - 31/12/2018)
regulatory rates (Euro - 31/12/2018)
ultimate forward rate
market (swap) rates, adjusted for credit risk
Page | 241
which also facilitates comparability. Comparability and consequent transparency have been
made possible by the harmonization of the valuation methods for technical provisions, as well
as the definition of risk-sensitive solvency standards. In addition, the disclosure to all types
of external stakeholders ((prospective) policyholders, creditors, investors, rating agencies,
etc.), further facilitates comparability between the different insurers. From the point of view
of insurers, comparability and transparency improve the level-playing field, and promote a
better integrated insurance market21
. Further, enhanced transparency and consequent
comparability is a key dimension of customers’ information and also trust in the insurance
market, thereby also supporting the functioning of the internal market. Transparency (and, of
course, information disclosure) partially palliates the asymmetry of information between
stakeholders and the insurance company. It empowers policyholders to make more informed
decisions, and it incentivises better risk management through the “pressure” implied by
visibility. The outcome of the Commission’s public consultation22
hints to the “trust”
dimension as being even more important than the information one, and even though NGOs
and consumers are not fully convinced that the reading is insightful for them, they are still
60% stating that all insurers should publish a SFCR on a yearly basis. Still, there could be a
question of the appropriateness of the current format, which the evaluation details in section
6.2 on efficiency.
Conclusion: In addition to the harmonisation of calculation methods, solvency
standards and supervisory methods assessed in section 6.1.1 and 6.1.3, transparency requires
sufficient access to such harmonised data. The yearly publication of a SFCR required by the
Solvency II Directive provides such access and consequent better comparability, which
incentivises better risk management, supports policyholders’ information and trust and is
therefore beneficial to the functioning of the internal market. Yet, for smaller insurers in
particular, the proportionality of such disclosure requirements can be questioned. This issue is
also addressed in section 6.2 (efficiency).
6.1.3. To what extent has Solvency II advanced supervisory convergence and
cooperation?
A principle-based framework
Solvency II empowers the European Insurance and Occupational Pensions Authority
(EIOPA) to have a key role in prudential supervisory convergence and cooperation. As a
member by default of all colleges of supervisors – permanent cooperation structures between
supervisory authorities of the different entities of a given insurance group and the group
supervisor – EIOPA supports a common approach to risk-assessment and information
sharing, complemented by relevant non-binding tools (notably, guidelines). EIOPA acts as a
“binding mediator” on key decisions on group supervision, including on internal models,
when disagreements arise between supervisory authorities. While there has not been any case
of such binding mediation so far, the existence of this mechanism incentivises supervisory
authorities to cooperate and converge in the way they exercise supervision.
21
While it is also key for supervisors to be provided with such comparable data, in order to improve supervisory
convergence. This dimension is detailed in the next subsection (6.1.3).
22
See also the Consultation’s outcome on the “Have your Say” page related to Solvency II.
Page | 242
The Article 242 Report23
by EIOPA concluded that there had been a substantial progress in
the convergence of practices of NSAs in matters of group supervision and supervision of
cross-border issues. Notwithstanding those improvements made in the supervisory
convergence, the expected outcome is not reached yet, and challenges would remain, as also
noted the Article 242 Report. One source of such challenges is that Solvency II is a
“principle-based” framework, as opposed to a rule-based framework; it sets out general
guiding principles without always specifying with a great level of details how to apply them
in practice. The advantage of this approach is that it leaves some leeway in the
implementation by firms and supervisors. Indeed, the flexibility can help to ensure a more
tailor-made application of the rules that takes into account the specificities of each company,
and the nature, scale and complexity of its risks.
In some areas though, the lack of prescriptiveness, for instance in relation to the assumptions
governing the calculation of insurers’ liabilities towards their clients, leads to material legal
gaps or uncertainties, which can raise issues of inconsistent application of the rules and of
level-playing field within the EU. In the case of internal models it can raise issues of
comparability.24
Indeed, while insurers that use an internal model must ensure that it captures
all material risks to which the insurer is exposed, Solvency II also prohibits that Member
States and supervisory authorities prescribe methods for the calibration of internal models.
Hence, on the one hand the methodological freedom for internal model calibration allows to
capture very specific risks and to reflect the particular situation of a company. On the other
hand, it also implies that insurers can use very different methods and that their outcomes are
difficult to compare. Due to this lack of comparability, the supervision of these insurance
companies is more demanding than the supervision of insurers that calculate their SCR with
the standard formula. Likewise, the comparison of prudential disclosures by insurers is more
difficult where at least one insurer uses an internal model than between standard formula
users only. This being said, contrary to what is discussed in the banking sector, in the course
of the consultation process no stakeholder has reported a severe issue neither regarding the
very nature of the internal models, nor regarding their level.
The same uncertainties arise for the provisions regarding supervisory actions in case of a
breach of SCR or of MCR25
(supposed to trigger, under some conditions, either a recovery or
a resolution process). It is illustrated in more detail by the series of issues identified in the
context of cross-border activities and as regards group supervision26,27
. These issues are
reviewed in the next two subsections.
23
EIOPA (2017), Report to the European Commission on the Application of Group Supervision under the
Solvency II Directive.
24
As mentioned above in the description of the Solvency II system, supervisors may approve the use of a partial
or full internal model for the calculation of the solvency capital requirement. At the end of 2019, insurance
companies using a partial or full internal model made up around 32% of the EEA insurance market in terms
of insurers’ liabilities towards policyholders24
.
25
In response to the Commission’s Call for Advice, EIOPA’s Opinion clearly identified the different issues
raised by the supervisory divergences in assessing and monitoring the insurance companies’ obligations as to
the (likely) breach of MCR (see EIOPA’s Background Analysis and Background Impact Assessment,
Sections 6, EIOPA 2020).
26
It implies for instance that the current design of the framework does not allow addressing the national
inefficiencies in cross-border supervision, as EIOPA’s powers remain limited in this aspect and the access to
Page | 243
These uncertainties may hinder the development of the internal market. And in case of
failure, they may give rise to situations where the policyholders are unevenly protected
depending on their country of residence or the country in which they have contracted the
policy.28
Indeed, national resolution regimes are mostly incomplete and uncoordinated.
Further, the patchwork of national insurance guarantee schemes29
, which are expected to act
as a safety net to pay policyholders’ claims or continue their insurance cover in the event of
their insurer’s insolvency30
, can leave some policyholders without any protection, or in a
legal uncertainty, as clear responsibilities cannot be ascertained in a reasonable period of
time.
Cross-border
One particular topic of concern for a well-integrated insurance market is the
supervision of cross-border activities by insurance and reinsurance companies. The
harmonised requirements under Solvency II aim to ensure uniform levels of policyholder
protection throughout the Union. Under this pre-requisite, insurers that have obtained a
licence to operate in one EU Member State under Solvency II rules are allowed to operate in
any other Member State (the so-called “EU passporting” system), which should facilitate
cross-border activities.
The current share of cross-border business in total business (direct and indirect) is indeed
substantial in European Economic Area (EEA) countries: almost 11% in 2019 (amounting to
EUR 173 billion) and slightly but consistently rising every year since 201631
, which seems a
positive signal of its development. For six EEA countries (Estonia, Ireland, Latvia,
Liechtenstein, Luxembourg and Malta), over 50% of their business is carried out outside the
home country. This increased cross-border activity in the EU internal market makes strong,
close and timely collaboration between insurance supervisory authorities necessary for
effective supervision.
Figure 6.1-13: Development of written premiums in cross-border activities in Europe
prudential information by the host supervisor proves to be difficult in the absence of clear-cut legal
provisions.
27
See also EIOPA Reports on group supervision (2017, 2018).
28
As illustrated by some recent failures of insurance companies which operated mainly outside the country
where they were initially granted authorisation (e.g. from Malta, Denmark, Liechtenstein, Cyprus).
29
See table in annex 13.1 of EIOPA’s background analysis (EIOPA, 2020), which provides an overview of the
existing national schemes and other mechanisms across the Member States.
30
Generally speaking, disorderly failure of a life insurer may cause material financial loss for policyholders on
their savings and pensions products. With regard to non-life insurance, losses to policyholders or
beneficiaries mainly result from outstanding claims at the moment of failure, and can lead to significant
social hardship. Given the typical structure of its liabilities, the failure of an insurance company can often
result in policyholders having to bear losses either because the failed insurer is unable to meet its payment
obligation in due time or by accepting a restructuring of their contracts, including possibly the haircut of
their claims in resolution.
31
EIOPA (2020d), “Peer Review on EIOPA’s Decision on the collaboration of the insurance supervisory
authorities”.
Page | 244
Source: EIOPA (2020d).
In comparison, in terms of the gross written premiums (GWP), there is slightly more non-life
than life business done on a cross-border basis and overall there is an equal split between FoS
and FoE business32
. However, in the countries with a majority of their business outside their
jurisdiction, the activity is mainly done on FoS basis33
.
Figure 6.1-14: Importance of cross-border business - 2019
Source: EIOPA (2020d).
Note 1: in blue: FoE; in orange: FoS.
Note 2: the vertical axis shows the percentage of direct insurance business outside the home country, as a
percentage of the total GWP.
Solvency II provides that the prudential supervision of those firms operating cross-border is
the responsibility of the national supervisory authority where the insurer is headquartered and
has therefore been granted a license (“home” supervisor). However, it requires strong
cooperation with the supervisory authorities of the other countries where the insurer is
operating (“host” supervisors) to avoid regulatory arbitrage and to ensure a consistent level of
32
The acronyms refer to activities undertaken under the Freedom of Services (FoS) principle, i.e. the right to
pursue business directly in another Member State, or under the Freedom of Establishment (FoE) principle,
i.e. the right to establish a branch in another Member State.
33
EIOPA (2020d).
Page | 245
protection for policyholders across the EEA, regardless of the company’s head office.
However, as Solvency II promotes a “risk-based” supervision, there could be an incentive for
a supervisory authority to give lower priority (and therefore lower resources) to the
supervision of insurers whose main activity is outside the local market, as risk management
drives the supervisory authority to put more emphasis on the market where more risk lies.
A Special Report34
of the European Court of Auditors (ECA) on EIOPA’s supervisory
convergence activities between 2015 and 2017 – therefore encompassing a period during
which Solvency II applied – also noted that “systemic weaknesses in the current supervisory
system for cross-border business remain”. More recently, the International Monetary Fund, as
part of one of its Financial Sector Assessment Programs, referred to “considerable
shortcomings in the supervisory framework” of some Member States. This can affect
citizens’ trust in the European insurance industry and is detrimental to the Single Market for
insurance services. In cross-border supervision in particular, EIOPA has actually played a key
role in promoting supervisory convergence. In addition, its powers were recently
strengthened35
, allowing the Authority to establish, on its own initiative, “cooperation
platforms”36
aiming to foster information exchange and coordination between the home and
host supervisors. EIOPA also developed supervisory tools that contributed to substantial
progress in convergence of supervisory practices. However, its enhanced role may prove
insufficient to ensure a high-quality convergent supervision across Member States, and
closing gaps may not always be achieved solely through non-binding tools. In addition, the
lack of data sharing between supervisory authorities may hinder the effective supervision of
insurers operating on a cross-border basis.
In the current form of the Solvency II framework, there is no clear way to address
deficiencies in national frameworks for cross-border supervision, as EIOPA’s powers remain
limited and the access to prudential information by host supervisor proves to be difficult in
the absence of clear legal provisions. This, notwithstanding the fact that EIOPA is in charge
of ensuring supervisory convergence, and contributes to the coordination of the supervision
of cross-border activities. When the lack of proper cooperation between Home and Host
Member States leads to the inability to carry proper supervision, it entails risks for
policyholders, as has been explained above.
The following structural issues have been identified37
in the cross-border area, some of which
are related to prudential supervision:
1. Access to information:
 Lack of timely information exchange: the lack of timely information exchange
between the home and the host supervisors, in particular in case of
deteriorated financial condition, generally prevents supervisory intervention at
34
ECA (2018), Special Report n.29.
35
On the 2019 review of the European System of Financial Supervision, see the European Commission’s Press
Corner at this link.
36
“Collaboration platforms” are cooperation structures aiming to strengthen the exchange of information and to
enhance collaboration between the relevant supervisory authorities where an insurance or reinsurance
company carries out, or intends to carry out, cross-border activities. See “Decision on the collaboration of
the insurance supervisory authorities”, EIOPA, 30 January 2017 (link).
37
See COM (2019) and EIOPA (2018) reports on group supervision.
Page | 246
an early stage, and is therefore detrimental to policyholder protection. In
addition, host supervisors are sometimes facing difficulties in obtaining timely
information regarding conduct of business or specific product information
from foreign insurers, as under current rules they have to rely on the
intermediation of the home supervisory authority. Another issue is related to
cases where an insurer decides to significantly change its business model and
to operate mainly on a cross-border basis. In such situations, no specific
information exchange is required with the host supervisor of the country
where the company decide to operate.
 Lack of knowledge inherent to the nature of the necessary information: Home
supervisors generally have limited understanding of foreign national laws,
regulations and insurance products. Such an understanding is however
necessary to ensure that insurers prudently value their liabilities towards
policyholders in foreign countries. On the other hand, host supervisors, who
have a better understanding of their local market, receive no prudential
information, and the review of the governance and risk management systems
of a foreign insurer is not in their remit.
2. Regulatory arbitrage opportunities:
 “Fit and proper” requirements: in accordance with the Solvency II
requirements, supervisory authorities need to ensure that the Board Members
of an insurance company are of good repute and integrity (i.e. that they are
“proper”), and that they collectively have the professional qualifications,
knowledge and experience to prudently manage an insurance company (i.e.
that they are “fit”). In practice, due to the principle-based nature of the
framework, some individuals who were not considered “proper” in one
Member State (e.g. for being under investigation for fraud or other crimes) can
manage to be approved as Board Members by the supervisory authority of
another Member State, by relying on the lack of information exchange and
communication gaps between authorities.
 Authorisation process: Other examples of regulatory arbitrage opportunity
relate to the authorisation process. Some insurance firms, which were not
granted authorisation to operate by the supervisory authority of one Member
State manage to be authorised in another one, with the intention to operate
exclusively or almost exclusively in the Member State that originally refused
the authorisation. Regulatory arbitrage is also detrimental to the trust in the
Single Market for insurance services.
3. Limited reporting requirements on cross-border activities: the Solvency II Directive
only refers to the reporting of “statistical information on cross-border activities”
which have to be shared by the Home supervisor with the other supervisory
authorities concerned. However, the Directive does not refer to reporting of
“prudential data” which could meet the prudential needs of both the home and host
supervisors.
4. Not fully effective decision-making process within collaboration platforms: by the
end of 2018, 9 collaboration (also called “cooperation”) platforms were operational
with the involvement of 19 national supervisory authorities. However, due to the
Page | 247
complexity of certain supervisory issues, NSAs may fail to reach a common view on
how to address them, with limited role for EIOPA in the legislation.38
5. In case of insurer failure: Currently, the insurance sector is not covered by any
European legislation on insurance guarantee schemes (IGS), unlike the banking39
and
securities40
sectors. The resulting patchwork of national guarantee schemes (where
they exist) does not adequately cover the losses for policyholders and beneficiaries if
the risk materialises, or does not ensure a sufficient continuation of their coverage. In
201941
, 17 Member States operate one or more IGS(s). Of those, eight Member States
(and Norway) cover both life and (selected) non-life policies insurance; five Member
States cover (selected) non-life insurance only; and another four Member States cover
life insurance policies only. This means that under the current conditions, not all
policyholders in Europe benefit from the protection of an IGS and that, where they do,
policyholders with similar policies would not necessarily enjoy the same degree of
protection in the event of liquidation. This patchwork also lacks a clear attribution of
duties and liabilities between the potentially responsible parties, sometimes even
within a single member state. It is obviously detrimental to public trust in the single
market for insurance services.
Group supervision
Compared to the previous regime, Solvency II introduced a more robust framework of
group supervision, as it lays more emphasis on the supervision of insurance groups that are
treated as single economic entities. The Directive assigns a key role to a “group supervisor”,
while recognising and maintaining an important role for the supervisory authorities of the
individual insurance entities.
Supporting the legal mandate set in the Directive to review the group supervision dimension,
a report by the European Commission to the European Parliament and the Council42
concluded that the framework of group supervision is robust, laying emphasis on capital
management and governance, and allowing for a better understanding and monitoring of risks
at group level.
In particular, Article 242(2)(b) of the Solvency II Directive required an assessment regarding
the practices in centralised group risk management43
. This assessment might also have
38
Within these collaboration platforms, the 2017 “Peer Review on EIOPA’s Decision on the collaboration of the
insurance supervisory authorities” identified divergent practices among NSAs in a number of areas. See the
Peer Review Report for more details.
39
Directive 2014/49/EU, ref.
40
Directive 97/9/EC, ref.
41
See background analysis supporting EIOPA’s Advice (EIOPA 2020), Annex 13.1:
https://www.eiopa.europa.eu/sites/default/files/solvency_ii/eiopa-bos-20-750-background-analysis.pdf.
42
Report from the Commission to the European Parliament and the Council on the application of Directive
2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking and pursuit
of the business of Insurance and Reinsurance (Solvency II) with regard to group supervision and capital
management within a group of insurance or reinsurance undertakings (link).
43
A regime for supervising groups with centralised risk management where the risk management processes and
internal control mechanism of the parent company cover the subsidiary. A centralised risk management is
subject to supervisory approval (Article 237 of the Solvency II Directive).
Page | 248
included a discussion on a group support44
regime as widely discussed in the development of
the Solvency II regime45
. However, both the Commission and EIOPA46
came to the
conclusion that there were no cases of centralised group risk management and no clear
benefits for groups to apply such a regime. It was not supported either to have a discussion on
a group support regime in the near future, taking into account that the responsibility remains
with the solo supervisors.
Against this background, the Commission’s public consultation47
asked stakeholders to
provide their views on specific aspects related to group supervision. First, the clear majority
of stakeholders (42%48
) found it not acceptable to waive solo supervision for entities
belonging to an insurance group, even under “strengthened” supervision of the group as a
whole. All respondents from public authorities answered in this sense.49
The question
implicitly included the above mentioned concept of “group support”, which signals that
stakeholders are clearly in favour of an appropriate capital allocation within the group and its
entities. Second, industry stakeholders largely support alleviating regulatory requirements for
intra-group outsourcing, conditioned to the existence of a centralized group risk management.
On the contrary, a vast majority of public authorities oppose such a proposal.
The reports around Article 242 mentioned above50
further indicated that due to legal
uncertainties, some areas of the framework may not ensure a harmonised implementation of
the rules by groups and supervisory authorities, with potential detrimental impacts on level-
playing field and policyholder protection. Areas where remaining issues have been identified
include:
1. Scope and mixed groups: Uncertainties in the determination of the scope of group
supervision and the supervision of mixed groups combining banking and insurance
companies (financial conglomerates);
2. Limited powers in some Member States over unregulated parent holding companies;
3. Third-country headquarters: Shortcomings and inconsistencies in the supervision of
insurance groups whose parent company is headquartered in a third country, with the
risk of uneven level-playing field in Europe between such international groups and
EEA groups;
4. Solvency position calculation: Lack of clarity and legal uncertainties regarding the
approaches and rules governing the calculation of the solvency position of an
insurance group, in particular when the group also has subsidiaries located outside the
EEA which are not subject to Solvency II on an individual basis;
44
The group support concept seeks to facilitate capital management by groups, essentially by a) allowing under
certain conditions a parent company to use declarations of group support to meet part of the Solvency
Capital Requirement of its subsidiaries, and b) introducing derogations to some Articles on solo supervision,
where appropriate.
45
See COM(2008)0119 (link) and Report of the Committee on Economic and Monetary Affairs of the European
Parliament on this proposal of 16 October 2008 (A6-0413/2008) – see at this link.
46
See COM (2019), EIOPA (2018).
47
Commission’s public consultation available at this link.
48
Of those expressing an opinion, vs 11% who agree on it.
49
The few participants that supported the above statement were invited to provide additional details, but did not
use this opportunity.
50
See COM (2008)0119, Report of the Committee on Economic and Monetary Affairs of the European
Parliament on this proposal of 16 October 2008 (A6-0413/2008), COM (2019), EIOPA (2018).
Page | 249
5. System of governance: Wide margin of interpretations regarding requirements on the
system of governance of insurance groups, which are not fully specified in the
Solvency II Directive, but simply defined as a mutatis mutandis application of the
provisions that apply to solo insurers.
Conclusion: The Solvency II framework has enhanced supervisory convergence,
relying on more standard requirements, more transparency and supervisory cooperation.
However, some legal uncertainties still arise in matters where there is some methodological
freedom, such as in the case of internal models. In addition, policyholder protection is still
uneven. This makes it necessary to further improve cooperation, in particular including
regular information exchange, to set clear and effective preventive measures, allow for early
identification of potential issues and optimally address potential failures. Given the increased
cross-border insurers activities, this also implies that the framework deserves effective last-
resort safety nets. As for group supervision, the framework has been assessed as robust,
laying emphasis on capital management and governance, and allowing for a better
understanding and monitoring of risks at group level. However, legal uncertainties in some
areas of the framework may not ensure a harmonised implementation of the rules by groups
and supervisory authorities, with potential detrimental impacts on level-playing field and
policyholder protection.
 Has the framework been effective in achieving its additional objective to foster
growth and recovery? More specifically:
6.1.4. To what extent has the Solvency II framework promoted better allocation
of capital resources?
Long-term investment is key to provide stable capital in order to finance tangible
assets (for instance, energy, transport and communication infrastructures, industrial and
service facilities, housing and climate change and eco-innovation technologies) as well as
intangible ones (such as education, research and development) that boost growth, innovation
and competitiveness. Many of these investments have wider public benefits, since they
generate greater returns for society as a whole by supporting essential services and improving
living standards. With assets under management worth more than 9 billion euros in
investments, the insurance sector remains a mainstay of the European financial industry and
among the largest institutional investors. They can contribute to the long-term investment
objectives. However, they have been retrenching from long-term assets over the last twenty
years, and the share of their investments in the real economy and infrastructure has remained
limited51
. The Figure 6.1-16 below illustrates this trend in equity investments.
A main objective of the Solvency II Directive was therefore to facilitate a better allocation of
capital resources at firm level, at industry level, and within the EU economy, through the
alignment of regulatory requirements with economic reality. This was expected to “result in a
decrease in the cost of raising capital for the insurance sector, and possibly also for the EU
51
From a prudential perspective, a long-term perspective encompasses the possibility for insurers to avoid
forced selling under stressed market conditions.
Page | 250
economy as a whole, through the role of the insurance industry as an institutional investor”52
.
More efficient allocation of capital within the economy was also expected to promote
financial stability.53
The Figure 6.1-15 below shows that insurers’ total investments have
indeed increased, and continued to increase after the entry of application of the Solvency II
framework.
Figure 6.1-15: Total investments of the EU insurance market (incl. unit-linked investments)
Source: ECB QSA dataset and Deloitte-CEPS analysis
Note: The ten most important EU Member States in terms of amounts are shown separately, covering 95,1% of the total at
2018 Q1. The re ai i g EU Me er States are lustered Other . For De ark, the o servatio period o l starts at
2005 Q1, for Ireland the observation period only starts at 2002 Q1 and for Luxembourg the observation period only starts at
2001 Q1.
Insurers do provide a lot of debt financing.54
However, despite the observed increase in the
amounts invested, it seems that not all types of investments have gained interest. Based on
EIOPA’s statistics, insurers are already largely investing in long maturity debt, bonds and
52
SEC(2007) 870, section 4.2.
53
In the same vein, the 2020 Capital Markets Union Action Plan (“A Capital Markets Union for people and
businesses-new action plan”, COM/2020/590 final) underlined again the instrumental role that insurers can
play in the “re-equitisation” and long-term financing of the European economy.
54
However, in order for businesses (in particular small and medium-sized companies) to expand or grow, they
also need to avoid being too much indebted and thus need capital financing. This is all the more the case in
the context of the ongoing Covid-19 crisis where businesses in several countries had access to grants and
loans, but are now facing high level of indebtedness while facing strong uncertainty in terms of economic
outlook.
Page | 251
loans (more than two third of their investment portfolio), which is consistent with the long-
term nature of insurers’ liabilities (notably life business) characterised by stable and regular
cash outflows.
But the proportions of investments in equities on the contrary are rather stagnating. As
illustrated in the below figure (Figure 6.1-16), the entry into application of Solvency II in
2016 has not led to a reversal of the long-lasting downward trend in equity investments by
insurance companies, here illustrated by the time series of the percentage of insurers’
investments allocated to listed equity.
Figure 6.1-16: Listed equity investments of the EU insurance market
Source: Deloitte-CEPS study.
It also signals that equity is not gaining any comparative advantage in the eyes of the
investing insurer. In the first quarter of 2020, investments in equity represented about 15% of
insurers’ total investments, from 16% two years before55
.
Figure 6.1-17: Total portfolio composition of the EEA insurance sector – Q1 2020
55
Source: EIOPA’s Statisti s (S.06.02): total direct investment in equity and trough CIU, excluding investment
relating to unit- or index-linked insurance products. There has been a long-term trend to reduced equity
ownership by insurers. In particular, the share ownership of insurers and pension funds dropped from
more than 25% of the EU stock market capitalisation in 1992 to 8% at the end of 2012.
0%
2%
4%
6%
8%
10%
12%
14%
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
2018
Q1
Listed
equity
(in
%
of
total
investments)
Listed equity investments of the EU insurance market
(incl. unit-linked investments)
Other
SE
LU
IE
BE
ES
DK
NL
IT
DE
Page | 252
Source: Commission services – EIOPA statistics (S.06.02).
Figure 6.1-18: Investment split in the EEA insurance market - 2016-2019
Source: EIOPA (2020c), p.15
Note: Look-through approach applied. Assets held for unit-linked business are excluded. Equities include holdings in related
undertakings.
What can be the reasons for insurers’ investment in equities to remain limited? First, once
again, Solvency II is a “risk-based” framework. Based on quantitative evidence (e.g.
historical price and volatility behaviour of financial assets), it defines capital requirements
Page | 253
according to the risk over a one-year horizon.56
Higher capital requirements on investments
are therefore applied to assets which are deemed more volatile and/or riskier, for instance
equity. Risk measures are currently not adjusted even where the intention is to hold bonds
until maturity and stocks for any foreseeable future. It also means that even if the share of
equity investments is limited to around 15%, equity risk represents more than 40% of capital
charges for market risk under the standard formula (according to insurers’ reporting to
supervisory authorities). As a result, the requirements provide lower incentives for insurers to
invest in equity, although such investments can contribute to the sustainable economic
recovery and long-term growth in the EU. Indeed, insurers have an important role as
providers of capital financing to businesses, in particular SMEs, and even more in the context
of the recovery to the Covid-19 Crisis. It also impacts insurers’ international competitiveness.
In fact, by having to “set aside” a high amount of regulatory capital when investing in equity,
insurers have less “available capital” to further expand internationally (e.g. invest in a foreign
subsidiary) or to offer products with guarantees to consumers.
Second, the downward trend in equity investments actually dates back to the beginning of the
21st
century. And the Study contracted by the European Commission on the drivers for
investments in equity57
also concludes that the Solvency II framework, which only entered
into application in 2016, is not the main driver of insurers’ investments, even by anticipation.
Likewise, EIOPA’s analysis suggests that the existing calibrations for equity are appropriate
and that financial data do not support the preferential treatment on long-term equity
investments which was introduced by the Commission in 2019.
Still, the regulatory framework is often reported by the industry as an important driver
hindering insurers’ ability to contribute to the long-term funding of the economy in the EU.
Over the recent years, the Commission made several amendments to Solvency II to dampen
this reported – unintended – disincentive for insurers to contribute to the long-term financing
of the European economy. Preferential treatments have indeed been introduced in order to
remove barriers to investments in long-term equities (as well as in infrastructure, in high-
quality securitisation and in privately-placed debt).58
However, overall, those new “asset
classes” remain “niche investments”, and many stakeholders maintain their claim that
prudential rules reduce insurers’ investment in such assets, as can be observed from the
replies to the COM’s public consultation59
. Indeed, only 7% of stakeholders belonging to the
insurance industry and 12.5% of public authorities indicated that the current framework
including its recent changes, appropriately addressed the potential obstacles to long-term
equity investments.
Figure 6.1-19: Public Consultation – treatment of equity investments
56
See also section 2 – Description of the intervention.
57
Europea Co issio , DG FISMA 9 : Study on the drivers of investments in equity by insurers and
pension funds ; prepared by Deloitte Belgium and CEPS.
58
However, there is no sufficient data yet to draw valid conclusions at the time of this evaluation.
59
Co issio ’s pu li o sultatio available at this link.
Page | 254
Source: COM services; analysis of the Public Consultation.
In particular, the recently introduced preferential treatment for long-term investment in
equities is used by a very limited number of insurance companies, and the existing complex
and conservative criteria may explain why less than 1% of European insurers’ equity
portfolio benefit from this new provision.60
Indeed, in EIOPA’s impact assessment, among
those companies which provided information on equity investments, only 3.6% indicated
using the “long-term equity” asset class from five Member States. For those firms, only
2.62% of total equities were classified as long-term equities (i.e. around € 4 billion of all
equities), representing for them a decrease in capital requirements on equity of about 1% only
compared to standard capital charges on equity.
Conclusion: An objective of the Solvency II Directive was to facilitate a better
allocation of capital resources at firm level, at industry level, and within the EU economy,
and it has been reinforced by the Delegated Regulation’s objective to foster growth through
the promotion of long-term investment. However, the investments share of the insurance
sector in the real economy and infrastructure has remained limited. Even the recent several
amendments to Solvency II, through preferential treatments for certain classes of long-term
assets, have not seem adequately designed to succeed in dampening this reported
disincentive. The criteria to identify the long-term assets qualifying for preferential treatment
are considered by the industry to be complex and not practical. A partial explanation for this
disincentive is the risk-based principle of the framework. Without further changes - taking
into account the necessity of adequately assessing the risk while ensuring enough investments
in the EU economy - the level of equity investments by insurers would remain far below its
level at the beginning of the 21st
century (three times less).
60
This also relates to results of the COM’s o sultatio e tio ed a o e, to hi h o ly 7% of stakeholders
belonging to the insurance industry indicated that the current framework (including its recent changes)
appropriately addressed the potential obstacles to long-term equity investments.
Page | 255
6.2. Efficiency
Summary assessment:
The Solvency II provisions on supervisory reporting and disclosure have enhanced
comparability, supervisory effectiveness and convergence, as well as transparency and
indirectly risk management practices, thereby fostering policyholders’ protection,
competitiveness and integration of the EU insurance market.
Due to the difficulties in obtaining reliable cost estimates and the lack of means to
quantify the general benefits of the Solvency II framework, it has not been possible to
carry out a full quantitative assessment of its efficiency at EU level. The available
evidence on compliance costs, however, suggests that the proportionality principle is
not fully implemented and that smaller insurers in particular, spend significant financial
resources to comply with the current regulatory requirements, in particular as regards
the reporting and disclosure requirements. Updating and clarifying the application of
the proportionality principle could improve the general efficiency of the framework.
6.2.1. Has the Solvency II Framework proven to be cost-efficient in delivering
on the objectives? To what extent are the associated costs justified by the
benefits it has brought?
General improvement vs cost of compliance
The three specific objectives of the Directive meant to facilitate the general ones are: (i)
to improve risk management, (ii) to increase transparency and (iii) to advance supervisory
convergence and cooperation. Most of their benefits have been reviewed in the effectiveness
section above (see section 6.1), they are numerous and often the combined effect of targeting
two or three of those objectives. Yet, they are difficult to measure in monetary terms, as they
are most often reinforcing the “normal” functioning of the insurance companies, clarifying
and/or standardizing existing internal requirements for instance, rather than replacing them.
The Framework established a new approach to risk management, which is now integrated in
the strategic processes of the insurers; it imposed more transparency and standardisation,
thereby allowing an easier access to information for the supervisors as well as for the
consumers (policyholders); thanks to this it also produced a more robust governance system,
reducing the probability of the insurer to fail, providing for more opportunities to prevent it or
to smoothen the impact of it, should it nevertheless happen. In the process, the Framework
benefits the society more widely. It increases the stability of the insurance sector, allows for
greater availability of insurance and greater investment in growth-enhancing sectors,
although not yet to its full capacity61
.
Being ambitious in its objectives, Solvency II is a very elaborated and complex framework.
Likewise, it generates high compliance costs, which for the smaller insurers in particular may
in some cases outweigh the benefits of the application of the framework. The “Study on the
61
Note that the stakeholders from the insurance industry often argue that there is a lack of supply of such
products for them to invest in.
Page | 256
costs of compliance for the financial sector” (hereafter named “Study on Compliance
Costs”)62
calculated for the insurers and reinsurers an average impact of the ongoing
“general” costs of compliance of more than 32 million EUR, which represents 2.18% of their
total operating costs, out of which more than half (1.12%) attributed to the Solvency II
Framework. For the one-off costs, it rises to 3.53% of the total operating costs attributed to
Solvency II. The Solvency II framework also ranked among the three most costly factors of
the study.
The supervisory reporting and disclosure requirements: opportunities and costs
A pivotal component of the Solvency II framework comprises the requirements for
supervisory reporting and disclosure (“pillar 3”).63
With regard to supervisory reporting, the
benefits of the Solvency II Directive are numerous as well. It allowed moving from mainly
national reporting to EU-level harmonised reporting. The new requirements have clear EU
added value by providing data to supervisors and regulators that was not available before and
enabling the EU-wide supervision of entire sectors. They also generate efficiencies in
reporting and foster the convergence of supervisory practices through more harmonised
requirements, which should enable supervisors to assess risks consistently across the EU,
based on comparable data.
In addition, by requiring the yearly publication of a “solvency and financial conditions
report” (SFCR), the Solvency II Directive has significantly enhanced transparency and
disclosure to all types of external stakeholders (prospective) policyholders, creditors,
investors, rating agencies, etc.. It has thereby facilitated comparability between the different
insurers, which allowed better EU market integration and reinforced policyholders’
protection.
These benefits may also explain why the stakeholders replying to the Public Consultation64
do not oppose the annual SFCR requirement. Even the industry seems to support a yearly
publication (51%), even though for 26.8% of them some insurers should only be required to
publish a yearly summary. As for the public authorities, they also mostly support the yearly
SFCR publication even though 25% of them would prefer more proportionality by exempting
some insurers from a yearly publication. In addition, EIOPA confirms in the background
analysis65
to its Opinion that “SFCR is an important tool regarding market discipline and the
reports are used by stakeholders”.
Figure 6.2-1: Public consultation: SFCR
62
Study on the costs of compliance for the financial sector, February 2020.
63
See section 2 – Description of the intervention.
64
Commission’s public consultation available at this link.
65
EIOPA (2020), Background Analysis, p. 407.
Page | 257
Source: COM services; analysis of the Public Consultation.
The specific objectives of EU supervisory reporting requirements are not spelled out in
legislation. Nonetheless, the main goal of these requirements — to provide supervisors with
the data they need to fulfil their functions that contribute to the wider objectives of financial
stability, market integrity and policyholder protection — continues to be highly relevant, as
well as the subsequent increased transparency and enhanced trust for policyholders.
On the other hand, this essential component also represents a major cost for insurers. As an
illustration, the German Insurance Federation (GDV) indicates that the preparation of the
2017 SFCR by a small non-life insurer required a total of 160 working days (full-time
equivalent). This cannot really be considered as on-going cost, as it was still the first years of
application and one can expect certain efficiencies reducing costs going forward. Afterwards,
the template SFCR can mostly be updated with relevant quantitative information, which
simplifies the process. Nevertheless, the cost may be significant for smaller insurers. And it
can be considered even more “unjustified” for small insurers where the granularity and
complexity of the information provided in the SFCR may be seen as excessive for
policyholders.66
As an illustration, according to the GDV67, in 2018, the 2017 SFCR of
German insurers were consulted on average 33 times per month, (46 times for life insurers,
27 times for non-life insurers).68
On the other hand, as mentioned above, EIOPA confirms in
the background analysis69
to its Opinion that reports are used by stakeholders. The outcome
of the Commission’s public consultation also shows that the SFCR’s reading is considered
insightful to a large majority by the insurance industry and public authorities, but only half
consumer/citizen respondents were of the same opinion. Some stakeholders also claim that
there is too much attention given to the SCR ratio, which can be very volatile (as explained in
section 0). In this regard, besides transparency, it is important to keep (and possibly disclose)
sufficient amount of information in the SFCR to avoid the focus on the unique “branding
SCR ratio”.
66
This issue could (at least, partially) be addressed by new EU and OECD initiatives addressing financial
literacy matters (see for instance the keynote speech of Commissioner McGuinness at the launch of the
Commission/OECD project to develop a financial competence framework in the EU (link).
67
See GDV (Gesamtverband der Deutschen Versicherungswirtschaft) official statement/survey (link).
68
The mere number of consultations is only of limited informative value. While insurers assume that most
readers are specialised market players, even if one assumed that only “simple” consumers had accessed an
SFCR, this would still represent a mere 0.03% of households.
69
EIOPA (2020), Background analysis, p. 407.
Page | 258
As for the cost on insurers, the “Study on Compliance Costs” further reports that within the
surveyed compliance costs for (re-)insurers, supervisory reporting costs represent about 36%
of the on-going costs. They amount to about 1.6 million EUR, i.e. 0.89% of total operating
costs on average. It is also noticeable that the median share of ongoing supervisory reporting
costs among smaller firms is twice as much as those observed among larger ones (49% vs
23%).70
The most significant one-off cost item is reported to be “familiarisation with
obligations”, while the most significant ongoing cost item is “training of personnel”. It also
implies that the number and frequency of changes, worsened by short implementation
deadlines, increase the costs incurred by reporting insurers (and supervisors).
Conclusion: To name only some benefits, the Solvency II framework established a
new approach to risk management and imposed more standardisation and transparency;
thanks to this it also produced a more robust governance system, more consistently
supervised, reducing the probability of the insurer to fail. In the process, the Framework
benefits the society more widely. It increases the stability of the insurance sector, allows for
greater availability of insurance and greater investment, although not yet to its full capacity.
On the other hand, it generates significant compliance costs, in particular – relatively – for
the smaller insurers.
6.2.2. Is there scope for increasing efficiency and making the rules more
proportionate?
Proportionality assessment (1): exempted companies
Principle
While the Solvency II framework implies high compliance costs as detailed above, it
already provides (Art.4) that very small insurers are excluded from the application of the
Directive if they meet a series of cumulative (quantitative) criteria.71
Outcome
In practice, the outcome of the proportionality principle is not that straightforward.
Indeed, for insurers which are not in the scope of the Solvency II framework, the national
prudential rules apply, and it is expected that national rules are less stringent in terms of
reporting rules. The national rules may in some cases extend the scope of application of
Solvency II, either by setting lower thresholds of exclusion than the ones set out in the
Directive, or by simply not introducing at all any threshold. In these cases, the requirement to
comply with Solvency II is not imposed by the Directive itself, but by national legislation.72
This is the reason why in 13 Member States, all insurance and reinsurance companies are
subject to the Solvency II requirements. Hence, the share of insurers exempted from
70
“small” vs “larger”: check Report’s definition/threshold.
71
See also section Error! Reference source not found. – Error! Reference source not found.. Note that there
is an additional nature-based exclusion criterion, as direct insurance companies considered complex are
covered by Solvency II even if they comply with the relative thresholds (i.e. those which underwrite
insurance or reinsurance activities covering liability, credit and suretyship insurance risks).
72
On the other hand, companies that wish to apply Solvency II framework have the right to do so (for example
to benefit from the European passport).
Page | 259
Solvency II rules widely differs between Member States, from 0% (in Czechia, Croatia,
Portugal etc.), to almost 60% (in Austria), for an average of 14%.73
Figure 6.2-2: Scope - Percentage of companies within and outside the scope of Solvency II, by
Member State, 2019
Source: EIOPA (2020) Opinion - Background Analysis.
As of today, the thresholds for exclusion have not been amended since the adoption of the
Solvency II Directive in 2009, and the only revision provided for in the framework is an
inflation-related one.74
Therefore, those thresholds may be considered as outdated. The first
update, if the 5%-threshold is reached, will take place in 2021. Still, the lack of reassessment
of the appropriateness of thresholds may imply high compliance costs for small companies in
the scope of Solvency II, which may not compensate the benefit of being subject to Solvency
II. As reported in the Commission’s public consultation, 59% of (responding) stakeholders
are satisfied with the current exclusion thresholds, while 41% are dissatisfied, which gives a
somewhat mixed opinion on the existing thresholds. Some of them are more explicit, asking
for increased thresholds with the reasoning that it allows NSAs to better adapt the
requirements to their national smaller firms.
Proportionality assessment (2) – conditional lighter requirements
Principle
Besides the proportionality principle provided for in the scope of the Directive, the
second layer of proportionality embedded in Solvency II is the requirement that the intensity
of the supervisory review process is commensurate to the “nature, scale and complexity” of
each company which is subject to Solvency II. Therefore, the application of the
proportionality principle does not depend on the size of the companies but on the risks that
they are facing. The framework as a whole is formulated in a modular manner, such that
73
EIOPA (2020), excerpt of the Background Analysis, p.364: “From the 16 Member States that have insurance
undertakings excluded from the scope of Solvency II, 5 apply a regime similar to Solvency II but with some
exemptions, 6 apply Solvency I and 5 a regime different from Solvency I or Solvency II.”
74
The EUR-amount thresholds shall be revised every 5 years, starting 31 December 2015, when the percentage
change since the previous revision is at least 5% (Art.300).
Page | 260
insurance and reinsurance companies must only apply those requirements, which are relevant
to the risks they incur.
For quantitative requirements (“pillar 1”), this “risk-proportionality principle” broadly takes
the form of “simplified calculations”. In other words, for several balance sheet items (best
estimate, risk margin) and risk (sub)-modules of the solvency capital requirements, the
framework allows insurers to use an explicit set of simplifications when such a use: (i) is
justified by the nature, scale and complexity of the risks underlying insurers’ obligations or
exposures; and (ii) does not lead to an underestimation of the risks or a misstatement of
insurers’ obligations.
A good governance and a robust risk management framework are essential to ensure that
insurance and reinsurance companies are able to properly identify, measure, monitor, manage
and report the risks that they are or could be exposed to. They are the object of the Solvency
II so-called “pillar 2” requirements. The extent and intensity of the different requirements
should of course be commensurate to the nature, scale, and complexity of each firm.
The Solvency II framework also builds on a third pillar, namely supervisory reporting and
disclosure. In terms of reporting frequency, insurers must submit quantitative data at least
annually, but some information are required to be reported by insurers on a quarterly basis.
However, for proportionality reasons, where the reporting requirements would be overly
burdensome in relation to the nature, scale, and complexity of the risks of each insurer (and
under some prudential and financial stability conditions), the Directive (Articles 35(6) &
35(7)) allows national supervisory authorities to: (i) waive or reduce the scope of quarterly
supervisory reporting requirements; (ii) reduce the scope of annual supervisory reporting or
exempt companies from reporting on an item-by-item basis. In each of those two cases, the
decision must not concern a total of more than 20% of Member State's life and non-life
insurance and reinsurance market respectively (where the non-life market share is based on
gross written premiums and the life market share is based on gross technical provisions).
Outcome
Several Member States, Members of the European Parliament and insurance
stakeholders have raised the concern that the current rules of the EU regulatory framework
does not sufficiently differentiate between the very large insurance groups and the very small
local companies. Moreover, a sizable number of respondents to the Solvency II consultation
submitted that, in their view, some of the Solvency II requirements may impose a
disproportionate burden on smaller and less complex insurers.
There is no specific report on the effective application of proportionality under Solvency II’s
three pillars.75
However, based on EIOPA’s technical advice and specific outputs (such as the
Peer Review on the Regular Supervisory Report), on exchanges at the Solvency II Review
Conference76
as well as the feedback to the Commission’s public consultation, the current
framework results in a limited implementation in practice of the proportionality principle, as
75
But EIOPA reports on exemptions and limitations on reporting (i.e. pillar 3).
76
As an example, the report from the Conference states that: “There was a general agreement on the need to
clarify the application of the proportionality principle in level 1 to ensure the legal certainty and
predictability of the supervision…”.
Page | 261
further illustrated in the paragraphs below. However, in terms of process, the outcome of the
Commission’s consultation reveals a mixed view, also reflecting the respondents’ role in the
supervision process. Indeed, 63% of the respondents from a public authority would keep the
large level of discretion they currently have, while in total only 15% of respondents express
support for the current level of supervisory discretion, and 44% say it should be reduced.
As regards the “pillar 1” (capital requirements), the framework for simplified calculations is
considered appropriate overall by stakeholders. However, the framework does not allow for a
reduced frequency of calculation for risk modules that are immaterial and complex to
calculate. In “pillar 2”, the Solvency II framework neither specifies how proportionality can
be effectively applied to existing provisions nor provides concrete criteria for their use. As a
very practical illustration, the framework does not clearly define situations where it may be
acceptable for a person carrying out a “key function” in a company to also carry out other key
functions. This results in a lack of transparency for the insurance and reinsurance companies
and a reluctance from supervisory authorities to apply some proportionality measures due to a
lack of clear legal hook, with a weakened supervisory convergence. The same goes for pillar
3, and the latest EIOPA’s Peer Review on the Regular Supervisory Report (“RSR 2020”)77
confirmed that the majority of the National Competent Authorities (NCAs) do not grant this
possibility for exemption and require an annual submission of the full RSR, while only one
NCA (Liechtenstein) has such an exemption option (set out in the local legislation). All in all,
around one-third of the NCAs (Belgium, Czechia, France, Germany, Ireland, Luxembourg,
Malta, the Netherlands, Portugal, Spain, the UK) apply, to a certain extent, the principle of
proportionality set out in the Solvency II Framework: these NCAs perform “risk-based
supervision” and set a different frequency of submission of the full and summary RSRs than
the EU-defined minimum.
In more detail, still according to EIOPA78, only 12 EEA NSAs granted limitations in
quarterly reporting to 683 companies (see below graph), representing approximately 27% of
the total number of insurers and reinsurers. Depending on the country, this does not
necessarily imply an exemption of quarterly reporting, but at least a reduced number of
information to be submitted. In terms of market share, such limitations concerned only 6.5%
of non-life insurers (in terms of gross written premiums)79, and 3.5% of life insurers (in terms
of life insurance liabilities towards policyholders)80.
Figure 6.2-3: Proportionality in Reporting - Exempted companies by EEA Member State
77
See EIOPA (2020b).
78
See EIOPA (2020a).
79
At national level, this percentage is above 17% in France, Luxembourg and Denmark, but below 6% in all
other countries.
80
At national level, this percentage lies between 3% and 5% in France, Liechtenstein, and Germany, but is
below 1% in all other countries.
Page | 262
Source: EIOPA (2020a), Commission services.
The number of so-called “quantitative reporting templates” (i.e. tables with quantitative data)
is not negligible, although proportionate to the size as shown in the below table. In total,
every year, large insurers have to report information spread over around 70 quantitative
templates. The 10% smallest insurers have to report every year quantitative information
spread over a bit less than 50 templates, which represents a reduction of approximately 35%
compared to the 10% largest insurers. Still, it also appears clearly from EIOPA’s background
analysis (2020, p.406) that quarterly reporting, including of MCR, is crucial in the monitoring
process.
Figure 6.2-4: Number of templates to be reported - 2019
Source: EIOPA (2020a), Table 1.4.
Conclusion: Parts of the industry remain concerned about the proportionality of the
EU-level requirements for smaller firms operating in local markets only. The thresholds for
exemption, although revisable to take account of inflation, have not been reviewed yet. The
number and frequency of changes, coupled with short implementation timelines, add to the
costs incurred by both reporting entities and supervisors. In addition, there is no systematic
and continuous assessment of whether each information to be submitted is (still) absolutely
necessary and adequate for the purpose of insurance supervision. Further, some disclosed
information seems too complex and/or overwhelming for the average policyholder, which
could imply a reduction rather than an increase in trust. There is therefore some room for
improvement as to the clarification of the proportionality possibilities allowed to the
supervisors by the Framework, as well as the adequacy of the reporting and disclosure
Page | 263
requirements and the possibility to specify reporting output differentiated according to the
needs of the target groups.
6.3. Relevance:
Summary assessment:
The main objectives of the Solvency II Framework – to deepen the integration of the
EU insurance market while ensuring sufficient policyholder protection and financial
stability, support the competitiveness of EU insurers and foster economic growth –
remain highly relevant.
However, the economic and financial conditions faced by insurers and reinsurers over
the recent years and months (in particular in relation to interest rate risks and market
volatility) pose new challenges to the adequate functioning of the Framework. It may
also raise financial stability issues, and the existing macro-prudential tools already
embedded in the framework may not be fit to sufficiently allow addressing potential
systemic risks in the insurance sector. In particular, Solvency II does not provide a
framework for the coordinated resolution of insurers. Similarly, there is no coordinated
approach of safety nets in the form of insurance guarantee schemes that would protect
policyholders and beneficiaries in case of failure.
Another newly emerged objective is the role insurers are expected to play as
institutional investors for a sustainable and green recovery. The current framework does
not manage nor reflect climate and environmental risks in insurers’ risk management.
6.3.1. Have the objectives proven to be appropriate?
As shown in section Error! Reference source not found., the implementation of the
Solvency II framework has achieved progress in relation to the different specific objectives,
thus being overall effective in reaching its general objectives, i.e. to increase the EU
insurance market integration, to enhance the protection of policyholders and beneficiaries and
improve competitiveness of EU insurers.
However, while the introduction of Solvency II has been a significant step towards improved
risk management and supervisory practices and has contributed to reduce the risk of failure
and near-failure, it has not fully eliminated it. In this perspective, even though the Solvency II
framework contains provisions on recognition of national reorganisation and winding-up
proceedings, it was not intended to provide an alternative to insolvency regulation. This can
impact both policyholders’ protection and financial stability.
As explained in EIOPA’s Opinion81
, a majority of Member States do not have an effective
recovery and resolution framework in place82
, and when they have, there are substantial
differences between those national recovery and resolution frameworks. These differences
81
EIOPA’s Opinion (2017).
82
As defined by the FSB and the IAIS.
Page | 264
include the powers and tools available to authorities, the conditions under which these powers
can be exercised and the objectives pursued when addressing the failure of insurers. Based on
EIOPA’s 2017 survey, 43% of NSAs identified gaps and shortcomings in their existing
frameworks to deal with failing undertakings. As a result, three Member States decided to
develop their own legislative framework while supervisors in other Member States have
started requiring preventive recovery plans from selected insurers. This situation however
contributes to a fragmentation of the single market for insurance. For those Member States
that did not follow this path, and as evidenced by the few failure and near-failure cases
recorded by EIOPA, the lack of sufficient preparedness of both insurers and public
authorities, the lack of adequate tools and powers or the lack of cross-border coordination
may have impeded a prompt and successful recovery or resolution of failing insurers in the
EU. Consequently, the level of protection for policyholders and beneficiaries may have been
suboptimal.
In addition, EIOPA illustrated in its advice that although a majority of Member States have
set up an insurance guarantee scheme (IGS) for certain life or non-life policies, the approach
they have followed for the design of the IGSs diverges quite substantially from each other.
Differences can notably be observed in terms of the role and functions, geographical
coverage, eligible policies, eligible claimants or funding. In contrast to the insurance sector,
the guarantee schemes in other sectors of the financial system have already been harmonised
at the EU level to address fragmentation. The current patchwork may have consequences for
the protection of policyholders as well as the functioning of the internal market.
Conclusion: The main objectives of the Solvency II framework – to deepen the
integration of the EU insurance market while ensuring sufficient policyholder protection and
financial stability, support the competitiveness of EU insurers and foster economic growth –
remain highly relevant. However, the economic and financial conditions faced by insurers
and reinsurers over the recent years and months (in particular in relation to interest rate risks
and market volatility) significantly differ from those during which the Solvency II framework
was designed. In addition, Solvency II does not provide a framework for the coordinated
resolution of insurers. Similarly, there is no harmonised and coordinated approach of safety
nets in the form of insurance guarantee schemes.
6.3.2. To what extent is the framework still relevant/appropriate given changing
market conditions?
Under Solvency II, the European insurance industry has proven to be financially very
robust. With levels of capital resources that remain more than twice as high as what is
required by the legislation, insurers’ solvency position has so far been sufficiently solid to
weather quite well the economic and financial consequences of the Covid-19 outbreak. Even
more, the insurers seem to have integrated in their own risk management practices both the
capital requirements set by the Framework as well as the risks posed by a volatile and
uncertain economic outlook, beside other stakeholders’ expectations (e.g. rating agencies).
However, the economic and financial conditions faced by insurers and reinsurers over the
recent years and months (in particular in relation to interest rate risks and market volatility)
significantly differ from those during which the Solvency II framework was designed.
Page | 265
Therefore, it may contain outdated parameters and provisions, possibly resulting in
unforeseen weaknesses and gaps in some areas of the framework. In particular, the following
shortcomings were identified.
Low interest-rate environment
Insurers are large investors of fixed-income securities (i.e. debt instruments that
generally pay a regular fixed amount of coupon interest). Hence, it is commonly accepted that
the current low interest rate environment is one of the main risks that EU insurance
companies have been facing over the recent years. And the longer the balance sheet, the more
vulnerable the insurer is to low-for-long.
Figure 6.3-1: Low interest rate - Composition of portfolios - 2020
Source: Commission services – EIOPA Statistics (asset exposures).
This low yield environment affects both insurers’ profitability and their solvency. Concerning
profitability, insurers are facing a downward trend in the return on their fixed-income
investment portfolio. Indeed, bonds that are gradually reaching maturity have to be reinvested
in new fixed-income securities offering lower yields. The exposure and related deterioration
of profitability will depend on the business model of individual firms. The decrease in
interest rates is particularly challenging where insurance products with relatively high
guaranteed returns have been sold in the past, and companies still hold a large portfolio share
in these products.
As regards solvency, the low-yield environment also has a direct impact on insurers’ level of
capital resources. Solvency II prescribes a market-consistent valuation of assets and
liabilities. Therefore, as illustrated below (
Figure 6.3-2), a decrease in interest rates results in an increase in the values of both assets and
liabilities. However, as life pension insurers’ assets are less sensitive (to changes in interest
Page | 266
rates) than liabilities, they increase less and consequently insurers’ solvency deteriorates
when interest rates fall. 83
Figure 6.3-2: Life insurance balance sheet: Impact of a decrease in interest rates
Source: Commission services.
Between 2018 and 2020, the level of interest rates (for the euro) has significantly decreased.
As shown in the below graph, while in 2018, interest rates used to value insurers’ liabilities
were positive for maturities above 4 years, in June 2020 they were negative up to a maturity
of 20 years.
Figure 6.3-3: Risk-free rate curve
Source: Commission services, EIOPA Statistics.
Note: Euro risk-free i terest rate ur e used to alue i surers’ lia ilities
In order to get an idea of the extent of the problem, one can refer to EIOPA’s advice on the
review of the Solvency II Delegated Regulation 2018 where it had already included its
83
The sensitivity depends on the duration of both the asset and liability side. In general, the duration on the
liability side is higher and therefore this side is more sensitive to interest risk change.
Page | 267
proposal to review changes to interest rate risk84
. EIOPA’s 2018 impact assessment suggested
that capturing negative interest rates in capital requirements would imply an average decrease
of 14 percentage points in solvency ratios. The actual decrease in interest rates (for maturities
up to 20 years) between June 2018 and June 2019 proved to be more significant than what
EIOPA had proposed to integrate in capital requirements85
. This means that between mid-
2018 and mid-2019, insurers faced a deterioration in their solvency position which was more
or less equal to the capital resources which they would have had to establish if negative
interest rates were appropriately accounted for in standard formula capital requirements. This
however did not generate wide-scale failures as insurers’ average solvency ratio remained
above 200%, as already evoked above.
The assumptions underlying the design of the capital requirements under the Solvency II
standard formula are therefore no longer adequate, as they do not envisage the possibility for
interest rates to even move in negative territory. Likewise, they do not envisage a further
decrease when rates are already negative. Therefore, the prudential framework leads to an
underestimation of the interest rate risk to which the insurers are exposed. In turn,
underestimation of interest rate risk can have negative effect on investment behaviours and
risk-taking activities by insurers. Indeed, it does not set explicit provisions to insurers to set
aside capital for the risk of negative interest rates, which has now materialised, with potential
side effects on financial stability. In this respect, only few stakeholders participating either to
the Commission’s or EIOPA’s consultations expressed the view that the framework does not
require any amendment as regards risk-sensitivity, in order to reflect the low interest rate
environment.
Conclusion: Insurers are large investors of fixed-income securities which implies that
the current low interest rate environment is a high risk for EU insurance companies. It
impacts their profitability (depending on their business model) and their solvency (the longer
the balance sheet, the more vulnerable the insurer is to low-for-long). As the capital
requirements under the Solvency II standard formula do not envisage the possibility for
interest rates to even move in negative territory, the prudential framework leads to an
underestimation of the interest rate risk to which the insurers are exposed. Which, in turn, can
have negative effect on investment behaviours and risk-taking activities by insurers.
Financial stability and macro-prudential risks
The benefits of a sound risk management and enhanced supervisory convergence,
both on policyholders’ protection and on financial stability are not to be questioned. As
illustrated in section 0, the number of failures and near miss events has actually decreased,
even though the likelihood to fail has not totally vanished. It is in line with a review
published by KPMG in February 2020 on “insurance undertakings insolvencies and business
84
See EIOPA’s webpage. Note that the Commission at that time decided not to endorse EIOPA’s advice but to
discuss it as part of the broader review of Solvency II Directive where all topics in relation to interest rates
could be discussed at the same time.
85
Beyond 20-year maturities, changes in interest rates between June 2018 and June 2019 proved to be lower
than what EIOPA had modeled.
Page | 268
transfers in Europe”86
that concluded on the positive effects of prudential regulations
introduced in Europe since 2001. In particular, the study noted that failures after 2001 have
significantly reduced in numbers and concerned smaller companies, thereby creating less
impact and affecting fewer creditors.
Most rules of the Solvency II Framework are targeted to individual insurers (so-called
“micro-prudential supervision”) and require holding sufficient capital to be able to weather
extreme adverse shocks in relation to risks. The risk-based nature of the framework requires
insurers to hold more capital for riskier behaviour. Those measures targeting risky behaviour
also contribute to addressing potential systemic risk stemming from large insurers whose
disorderly failure could cause disruption to the global financial system and economic activity,
due to their size, the complexity of their investment and underwriting activities, and/ or their
interconnectedness with financial markets and the wider economy. Some provisions of the
framework (including those aiming to reduce short-term volatility impact) also aim at
addressing systemic risk stemming from “pro-cyclical behaviours” by a large number of
(possibly smaller) insurers, which may collectively act as an amplifier of market downturns
or of an exogenous shock. For instance, in case of significant market turmoil, insurers that
breach their capital requirements may be granted longer deadlines to restore compliance with
quantitative requirements, with the aim to avoid forced-sales of assets which could amplify
negative market movements.
However, these tools provided for in the Solvency II Directive have been thought through at a
time where the insurance sector was still deemed mostly protected from “domino effects”
such as those that have been observed in the banking sector. As the market conditions were
good for insurers, and the “low-for-long” not yet in sight, interconnectedness with other
market participants, intersectoral impacts and common risky (herding) behaviours among
insurers may have been partially overlooked, not sufficiently allowing addressing potential
systemic risks in the insurance sector. As explained above, there are regulatory tools
embedded in Solvency II, but they may be insufficiently fit for purpose and too narrow in
terms of scope to effectively prevent a build-up of systemic risk in the insurance sector and to
allow an appropriate macro-prudential supervision (i.e. a supervision of insurance sector as a
whole). EIOPA and the ESRB also state that those provisions offer limited possibilities for
public authorities to preserve financial stability, and to address risks generated by the
insurance sector itself. In particular, they point to a lack of harmonised framework for
coordination and management of crisis situations, including for the largest European insurers
with international activities and potential systemic footprint, which would not be consistent
with the objectives and standards developed at international level by the International
Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB). Indeed,
the revised (November 2019) Insurance Core Principles and Common Framework for the
Supervision of Internationally Active Insurance Groups (IAIGs) of the IAIS consider pre-
emptive recovery planning as necessary at least for IAIGs, and the FSB requires resolution
planning for insurers that could be systemically significant or critical if they fail. Both require
a set of appropriate resolution powers.
86
This study – prepared for, an on behalf of, the following industry associations: ICISA, ITFA, IUA and
Lloyd’s Market Association – reviewed the non-life insurance company failures over the last 30 years within
UK, FR, IT, DE, NL, SE and Gibraltar. See KPMG 2020 (in Annex 5 on IGS).
Page | 269
The below examples illustrate potential sources of such systemic risk in the insurance sector
that may still be insufficiently addressed by the tools embedded in the legislation.
Search-for-yield behaviour:
Due to the persistently low and declining yields on fixed-income securities, (life)
insurers are facing growing pressure on investment returns, as the excess of insurers’
investment income over the guaranteed returns on the insurance policies that they are offering
is progressively decreasing.
According to the European Central Bank (ECB), for the euro area insurance sector as a
whole, the difference between coupon income from debt securities and average guaranteed
rates was approximately 1% in 2019. Assuming that the current interest rate environment will
persist until 2030, even if taking into account the reduced guaranteed returns on new
contracts, the spread between average coupon rates and guaranteed returns would narrow
further to 0.7%. Such a projection is an “average trend” which may hide more significant
challenges in some countries.
This can lead to increased risk-taking by insurers (in more risky or illiquid assets) in order to
get higher yield, with demand sometimes exceeding supply in certain asset classes, which in
turn may further boost asset prices and generate “bubbles” if not well-monitored. These
“bubbles” can make the sector more exposed to the risks of rising spreads on fixed-income
securities and plummeting equity prices. If those risks materialise, they may prompt insurers’
fire-sale of risky assets to restore their solvency position (by “de-risking” their investment
portfolio), which can amplify a market turmoil. This procyclical behaviour could cause a
circle of fire-sales, deteriorating asset prices and even more fire-sales of assets. A prolonged
period of low yields may therefore promote a further build-up of vulnerabilities for the
financial sector. An attentive supervision, and further an effective supervisory collaboration,
allowing a good overview of the market situation, would be even more crucial in that
situation.
Yet, during 2020, this risk has not really materialised, as European insurers largely managed
to weather the negative impact of the Covid-19 crisis, with levels of capital resources that are
still more than twice as high as what is required by Solvency II. Even taking into account the
stabilising impact of the intervention by central banks, at this stage, the level of risk taken and
managed by insurers seems to remain appropriate.
Concentrated investment portfolio
An increasingly high concentration of insurers’ investment portfolio in certain asset
classes, counterparties or sectors can be an additional source of systemic risk. First, insurers
(life insurers in particular) represent a significant source of funding and liquidity to other
financial actors, banks in particular.87
They are therefore interconnected with them. It implies
that the shocks in one financial sector might spill-over to others.
87
As an illustration, insurers hold bonds issued by banks for an amount of EUR 976.5 billion (42% of all
corporate bonds held are from banks), EIOPA (2020), Financial Stability Report.
Page | 270
In addition, as mentioned in sub-section 6.1.1 about volatility adjustment and shown on the
graph below, insurers invest heavily in (domestic) government bonds, which exposes them to
potential renewed stress in sovereign markets when spreads in government bonds of some
Member States experience periods of high volatility. Indeed, the ECB also notes a high
concentration of sovereign debt in insurers’ debt securities portfolios (up to 70% in the
Eurozone). The high level of exposure to domestic sovereign debt (“home bias”) can also
generate higher risks for the insurance sector, due to the potential of an asymmetric recovery
from the Covid-19 crisis across Member States.
Figure 6.3-4: Investment Portfolio - 2020
Source: EIOPA Statistics (assets).
Finally, in view of the recent deterioration of the economic outlook, insurers’ credit risk may
increase, as their bond portfolio comprises a large share of lower-rated corporate bonds
whose issuers may default or be subject of wide-scale rating downgrades by credit rating
agencies. Credit risk exposure of insurers requires therefore close monitoring, as the risk of
wide-scale rating downgrades could imply both large reductions in asset values and higher
capital requirements for the insurance sector. In the worst-case scenario, insurance firms
might de-risk and sell their portfolios, thus risking a spreading of risks throughout the
financial system.
Potential liquidity strains
The insurance business model relies on the principle of “inverted production cycle”: the
premiums are collected prior to the payment of eventual claims, which are usually spread
over months or years. For this reason, insurance companies are probably less exposed to
liquidity risk than banks, and EIOPA reports that the extent of this risk has decreased since
the beginning of the year (classified as “medium”).88
At the same time, EIOPA, the ECB and the ESRB suggest that this type of risk, which can
arise on both the asset and liability sides of insurers’ balance sheets, may not be appropriately
monitored and may differ depending on insurance policies clauses. On the asset size, insurers
have slightly decreased their exposure to high-quality liquid assets in their portfolios, from
88
EIOPA Risk Dashboard – October 2020.
Page | 271
34% in 2013 to 32% in 2018. Due to the Covid-19 crisis, they may also face shortfalls on
expected premia inflows (due to premium payment holidays), and decreases in investment
income (for instance due to payment disruptions, e.g. in the form of moratoria on residential
and commercial mortgages, which are held by insurers in some countries to a material extent,
or decrease in dividend distributions by corporates). In addition, some insurers may use
derivatives to hedge some of their risks, and if used to a large extent, they may be subject to
significant margin calls in case of sharp decrease in the market prices of these derivatives so
that additional collateral could be required.
On the liabilities side, uncertainties regarding the coverage of business interruption by
insurance companies, and the likely rising claims for event cancellation will generate higher
pay-outs by insurers. In addition, some life insurance products allow investors to redeem their
funds at short notice, while the underlying assets are structurally, or can suddenly become,
relatively illiquid. This exposes insurers to potential liquidity risk in times of stress unless
national laws already allow for temporary freeze in surrender rights in case of liquidity
constraints. In addition to this risk affecting all forms of redeemable life policies, unit-linked
insurance products may expose insurers to structural liquidity risks, similar to those inherent
in investment funds.
Insufficient coordination of macro-prudential measures
Due to the nature of the principle-based framework and the related lack of certainty in
some supervisory areas, there may still be a diversity of supervisory responses when there is a
European-wide economic and financial shock. It has been illustrated with the Covid-19
outbreak, where EIOPA publicly urged that insurance companies temporarily suspend all
discretionary dividend distributions and share buy backs aimed at remunerating shareholders.
As this statement was not binding, it resulted in different effective implementation according
to NSA’s and in practice, supervisory approaches proved to be inconsistent across the EU.89
This inconsistency may question the ability of public authorities to effectively preserve
financial stability, and raises issues of supervisory coordination and level-playing field within
the EEA. The issues related to supervisory convergence have been assessed above in section
6.1.3.
Insufficient supervisory toolkit to intervene when firms are in financial distress
In the traditional business model of insurance, due to the characteristics of the
insurance activities (i.e. premiums paid in advance and usually long term commitments), the
deterioration of the financial position of insurers can be monitored over time. In addition,
with the exception of some life products which features could be similar to savings products
in banking, the insurance industry is usually mildly exposed to the risk of runs90
. For these
reasons, the “intervention ladder” of Solvency II enabling supervisory actions before the
breach of the minimum capital requirements (MCR), combined with the preferred ranking of
89
Additional issues arose due to the inconsistent approaches followed by national supervisors regarding intra-
group dividend distributions (i.e. dividend payments from one insurance subsidiary located in one country to
the ultimate parent company headquartered in another one).
90
Even though digitalisation could accelerate the procedure to exercise surrender’s rights.
Page | 272
policyholders in the creditors’ hierarchy91
, should ensure the sufficient availability of assets
to cover the obligations of a failing insurer towards policyholders and beneficiaries.
In practice, however, the situation differs. As illustrated by EIOPA’s analysis92
, the most
common causes underlying the failure or near-failure of an insurance company are
investment, asset-liability management and underwriting/technical provisions evaluation
risks. And experience has shown that, despite the existing Solvency II arrangements, in some
circumstances, the efforts to recover an insurer in financial distress are inefficient or run into
legal or operational difficulties, as the insurers have not prepared their recovery options in
advance. Likewise, public authorities may fall short of options that could effectively avoid
the winding-up of the insurer as they have not looked at failure scenarios and have not
anticipated possible impediments to deploying alternative measures. Furthermore, public
authorities do not always have sufficient tools to avert the failure of insurers. As reported by
EIOPA93
, one third of NSAs identified gaps and shortcomings in their existing preventive
powers and in their range of resolution powers.
Likewise, public authorities often lack alternatives to insolvency for failing insurers. Even
traditional tools for an orderly wind-up such as run-off (i.e. a ban on writing new business
while fulfilling existing obligations) and transfer of portfolios are either unavailable or
subject to restrictions in some Member States. In addition, the situation of insolvency, the
length of its process94
and, possibly, the prevailing stressed market conditions, might make
the valuation process more complex and create material differences with the Solvency II
estimates in going concern. There could thus be an uncertainty on the amount of losses that
would effectively need to be absorbed. Moreover, insolvency proceedings are rarely at the
advantage of policyholders and beneficiaries. This contributes to ineffective value
preservation and considerable social or financial hardship for policyholders and beneficiaries,
in particular in cases where an equivalent protection could not be found at acceptable
conditions, due to the age of the subscriber for instance. Similar situations would also be met
in the case of specialised insurers for which substitutability would be an issue. More broadly,
insurers provide important functions to society at large and to the economy. A sudden
interruption of risk coverage can have a systemic impact in case it is not immediately
substitutable. The failure of a large, interconnected insurer or of several smaller insurers can
also have an impact on financial stability.
Finally, despite general cross-border coordination mechanisms for supervision, there is no
clear framework for coordination and cooperation between authorities to prepare and manage
a (near) failure. This can result in conflicts of interest and a misalignment between the
national accountability and mandate of supervisors (protecting the interest of policyholders at
national level) and the cross-border nature of the insurance industry that is not coherent with
the single market objectives of Solvency II. Cross-border cooperation and coordination is
however essential to support recovery, eliminate impediments to an orderly resolution
process and reduce suboptimal outcomes at the EU level. In addition, national initiatives
91
See legal provision under Solvency II.
92
See EIOPA (2018a), Report on failures and near-misses.
93
See EIOPA’s Opinion on the harmonisation of recovery and resolution frameworks (2017).
94
Most of them are court-based and could therefore take a long time before they are settled and result in a
definitive pay-out.
Page | 273
creating a recovery and resolution regime locally to address that situation could further
contribute to fragment the current landscape across the EU.
Further, the likelihood of (near) failure has not disappeared.
Figure 6.3-5Error! Reference source not found. shows that the overall trend has been
decreasing, in particular since the entry into force of Solvency II (2016), yet not reaching
zero.
Figure 6.3-5: Evolution of failure and near miss events
Source: see Annex 5 - IGS
When failure occurs, the disorderly winding-up of a failing insurer may cause significant
disruption to the financial system and economic activity, depending on its size, the
complexity of its activities, the concentrated nature of its businesses (e.g. export insurance
where demand for insurance is significant), and its interconnectedness with other financial
market players and/or the wider economy (“domino effect”).
Going a step further then, and noting that the balance sheet of an insurance company is
essentially composed of liabilities towards policyholders (by opposition to equity or debt
instruments), past insolvencies of insurers have shown that policyholders need to absorb
losses, either directly or indirectly through the renegotiation of their policies. The existence
of an Insurance Guarantee Scheme (IGS) could provide a last-resort protection to
policyholders and beneficiaries in these cases. However, a considerable share of
policyholders in the EU do not benefit from any IGS protection or, while holding the same
type of insurance policy, policyholders may benefit from a different level of IGS protection
depending on where they live and where they have contracted their policies.95
Conclusion: The number of failures and near miss events has actually decreased, but
the possibility of failure remains. Failures after 2001 have significantly reduced in numbers
and concerned especially smaller companies, thereby creating less impact and affecting fewer
creditors. However, despite the achievements in insurers’ solvency state and monitoring,
some concerns remain as to the possible effects of increased search for yield, excessive
investment concentration, inappropriate assessment of possible liquidity stress and
95
See Annex 5 for further analysis on the current situation as regards IGS protection in the EU.
Page | 274
insufficient EU-wide coordination. In particular, the toolkit for supervisors when insurers
(risk to) fail seems to be unclear or insufficient to efficiently monitor, prevent and accompany
possible financial distress of companies.
6.3.3. To what extent is Solvency II suited to deal with new challenges?
Long-term investment and sustainable dimension
As already explained, Solvency II is a “risk-based” framework. Based on quantitative
evidence (e.g. historical price and volatility behaviour of financial assets), it defines capital
requirements, i.e. the amount of capital resources that insurers have to set aside in order for
them to be able to cope with very extreme adverse events96
. Higher capital requirements on
investments are therefore applied to assets that are more volatile and/or more risky, for
instance equity. This principle is applied without taking into account other EU political
objectives, in particular the Capital Markets Union Action Plan and the European Green
Deal. Actually, it may provide lower incentives for insurers to invest in those assets, although
such investments can contribute to the sustainable economic recovery and long-term growth
in the EU.
First, the incentives towards long-term investments in general have proven insufficient, as
discussed in Section 6.1.4 (effectiveness). Second, the financial risk for some categories of
sustainable investments may already be lower or, notably with respect to transition risks,
could be lower over the longer run. Current capital requirements would not capture such
(lower) financial risk and the current framework may therefore not foster investments in
environmentally sustainable (“green”) activities.
The Communication on the European Green Deal97
states that climate and environmental
risks should be managed and integrated into the financial system. To this end, the
Commission will adopt a renewed sustainable finance strategy in 2021. As regards insurers,
the objective is twofold: it concerns both how insurers invest their money and how they take
into account sustainability factors in their risk management. With respect to the former,
insurers can play a role in reducing the investment gap for environmental-friendly assets and
activities. The 2030 climate and energy targets agreed at the end of 2020 are estimated to
require €350 billion of additional annual investment98
– which represents around 34% of EU
insurers’ gross written premiums in 2019.
However, EIOPA estimates that only up to 5 % of the total asset value held by insurers may
qualify as investments in sustainable activities (as identified by the “Taxonomy”99
), and
therefore contribute to the climate objectives of the European Green Deal100
. It has to be
assumed that this stock of potentially sustainable investments has been built up over several
years and that annual flows into sustainable investments by insurers are far lower than the
estimated need of annual investments to achieve the Union’s objective of a climate-neutral
96
Defined as 1-year duration shocks whose probability of occurrence is 0.5%.
97
Commission Communication: European Green Deal (EUR-Lex link).
98
Commission Communication: Stepping up Europe’s 2030 climate ambition (EUR-Lex link), page 4
99
Throughout this document, “taxonomy” refers to the technical screening criteria for the identification of
sustainable economic activities as adopted under Regulation (EU) 2020/852.
100
EIOPA (2020), Financial Stability Report (link), thematic report starting on page 88.
Page | 275
continent. For equities and corporate bonds, approximately up to 13% and 6% respectively of
the asset value held by insurers for each type of securities might qualify as environmentally
sustainable investment. The higher share for equity investments is mainly explained by
insurers’ equity holdings in other (non-life) insurance companies (approximately 7%), which
is an eligible sector under the “taxonomy”. More detailed statistics are provided in the below
graph for corporate bonds and equities per type of insurance companies.
Figure 6.3-6: Ta o o - Potentially eligible Investments - 2019
Source: EIOPA, The EU Sustainable Finance Taxonomy from the Perspective of the Insurance and Reinsurance
sector, published in the Financial Stability Report, 2020.
Note: The figures represe t a upper li it for ta o o eligi ilit , as the represented sectors may qualify as
environmentally-sustainable activities.
While those data may be under- or overestimated due to the inability to have a
comprehensive overview of insurers’ indirect investments through funds and insufficient
information to assess “taxonomy” compliance conclusively, the share of green investments in
insurers’ asset portfolio seems too low to achieve the Union’s objective of a climate-neutral
continent. It has to be noted that the current rules on capital requirements do not capture the
possibly lower (resp. higher) level of risks over the long term of some categories of “green”
(resp. “brown”) assets for the investor.
Furthermore, insurers are exposed to climate and environmental risks through their assets and
liabilities towards policyholders.
As regards insurers’ investments, EIOPA analysed a scenario of the materialisation of
transition risk. EIOPA estimated its scenario to lead to a reduction of the excess of assets
over liabilities101
by up to 3.4% at country-level102
. EIOPA intends to refine its methodology
for further analyses over the next years.
101
The excess of assets over liabilities is the starting point of the determination of an insurer’s own funds.
EIOPA has used the excess of assets over liabilities as proxy for own funds or “free assets” in several
publications (notably the ‘Insurance Stress Test Report’ of 2018 and the ‘Sensitivity analysis of climate-
change related transition risks’). At the end of 2019, EU insurers’ total own funds eligible to cover the
solvency capital requirement exceeded their total excess over liabilities by around 5.7%.
Page | 276
Figure 6.3-7: EIOPA s severe s e ario
Source: EIOPA (2020f): Sensitivity analysis of climate-change related transition risks.
As regards insurers’ liabilities, EIOPA tested the impact of a scenario encompassing a series
of four windstorms, two floods and two earthquakes distributed throughout Europe as part of
its insurance stress conducted in 2018103
. The sum, over participating insurance groups, of the
excess of assets over liabilities (AoL) dropped by only 0.3 percentage points. That indicates
that the insurance sector is currently not particularly vulnerable to climate events.104
However, a more recent analysis by EIOPA of the available evidence concluded that climate
change is already affecting flood risk as well as subsidence risk and impacts on hail risk at
regional level105
. The present Solvency standard formula parameters for those risks are
calibrated to reflect the current risk and do not aim to capture future increases of the risk due
to climate change. Furthermore, the standard formula sets out parameters for a closed list of
natural catastrophe risks that are considered to be material and to which the European
insurance sector has significant exposure106
. Climate change may lead to additional risks
becoming relevant for the European insurance sector.
102
EIOPA (2020f), Sensitivity analysis of climate-change related transition risks. EIOPA considered a scenario
where delayed policy action is taken to abruptly move the economy to a path that is more likely to result in a
2 degree outcome than the current (baseline) pathway, in line with the Paris agreement to limit global
warming compared to pre-industrial levels (“late and sudden” policy scenario, see page 24 and following).
More specifically, EIOPA assumed an increase in carbon price per ton by the end of this decade set in order
to limit carbon concentration to around 450-500 ppm.
103
EIOPA (2018c), Insurance Stress Test Report.
104
In general, the more highly affected participants are reinsurers and those direct insurers largely involved also
in reinsurance activities.
105
EIOPA (2020e), Discussion Paper: Methodology on potential inclusion of climate change in the nat cat
standard formula.
106
The standard formula sets out parameters for following natural catastrophe risks: flood, windstorm, hail,
earthquake, subsidence.
-1,7%
-3,4%
-1,2%
-1,0%
-0,9%
-1,8%
-1,3%
-1,0%
-1,7%
-3,3%
-1,0%
-1,9%
-1,8%
-1,2%
-2,8%
-1,3%
-0,7%
-1,7%
-0,9%
-2,7%
-1,4%
-3,4%
-0,5%
-1,9%
-0,6%
-2,3%
-2,3%
-4,5%
-3,5%
-2,5%
-1,5%
-0,5%
0,5%
AT BE BG HR CY CZ DK EE FI FR DE GR HU IE IT LV LT LU MT NL PL PT RO SK SI ES SE
Change in value of re-priced equity, corporate bonds, fund and government bond investments
excluding unit-linked (aggregated at country level). Values given as share of excess of assets
over liabilities. Severe scenario and extrapolation method 2.
gains losses Total
Page | 277
Figure 6.3-8: Assets over liabilities: stress test for natural catastrophes
Source: EIOPA (2018c), Insurance Stress Test Report.
EIOPA has also identified several actions that insurers could take to ensure that climate and
environmental risks from assets and liabilities are duly taken into account107
. The
Commission ran an Open Consultation on a Renewed Sustainable Finance Strategy108
, where
most stakeholders agreed that “the EU should take further action to mobilise insurance
companies […] manage climate and environmental risks, beyond prudential regulation”. The
most frequent proposed options comprise enhanced disclosure requirements and guidance on
impact investment, rules on risk management)”. ESG-related disclosure requirements are
being looked at under the review of the non-financial reporting directive and the concept of
stewardship in the context of investments has recently been introduced in Solvency II rules.
Furthermore, several clarifications to Solvency II risk management and governance rules
were already introduced making use of existing empowerments for delegated acts109,110
.
While Solvency II contains a general requirement on insurers to take into account all risks in
their risk management, the Directive does also name particular risk categories explicitly.
However, climate and environmental risk is not one of those risk categories and it would
often materialise through other risk categories, e.g. market or underwriting risk. This may
result in a lack of clarity as regards whether and where insurers are expected to reflect climate
and environmental risks and, as a consequence, in insufficient management of those risks by
insurers.
107
EIOPA (2019), Opinion on Sustainability within Solvency II (link).
108
The consultation and its feedback can be found at this link.
109
Delegated Regulation (EU) 2021/1256 amending Delegated Regulation (EU) 2015/35 as regards the
integration of sustainability risks in the governance of insurance and reinsurance undertakings (OJ L 277,
2.8.2021, p. 14)
110
In addition, in the Consultation on the Review of Solvency II stakeholders had the possibility to rank five
possible overall objectives of EU legislation for the insurance sector. Among the five choices, fostering
sustainable investments ranked the lowest while policyholder protection and financial stability ranked the
highest.
Page | 278
Solvency II and the digital transformation
The Solvency II framework is quite fit for future financial and technological developments,
as it is already neutral with respect to many digital developments (see below). In addition,
EIOPA has empowerments to make it even fitter, engaging in many data projects to also
advance technological solutions (with reporting already being largely automated and
digitalised). Furthermore, as detailed in section 6.4 on the coherence criterion, facilitating the
digital transformation in the financial sector is a separate horizontal workstream.
Since the Solvency II Framework is already digitally advanced, envisaged changes
would be neutral
Since the entry into force of the Solvency II Directive in 2016, all quarterly and annual
reporting submissions and disclosure obligations are sent digitally. Therefore, the Solvency II
Directive does not require any regular submission of information in paper. Further possible
improvement of regular costs in that matter would probably be negligible in terms of cost-
savings.
Several initiatives have been undertaken to explore the possibilities that the new technologies
offer, aiming to understand how the development of new technologies or advantages to the
use of big data could interfere with the framework’s requirements. In line with the Digital
Finance Strategy, the Commission services are working on a supervisory data strategy to
further streamline supervisory reporting across the financial sector. As part of this, the
Commission services envisage to give a mandate to EIOPA to analyse (together with the
other ESAs and the ECB) the scope for further integrating supervisory data collection and
facilitating the use of data already reported within other European reporting frameworks to
competent authorities, both national and European ones in the Solvency II Directive. This
would allow supervisors to “recycle” data that, for example, other market participants submit
to their relevant authorities like ESMA or the national central banks.
Insurers as targets of cyber-attacks and as providers of cyber risk protection
Increased digitalisation and use of big data may indeed lead to more frequent and
sophisticated cyber-attacks. In this respect, insurers could be both targets of cyber-attacks but
also providers of protection.
Cyber risk is however also relevant for other financial services providers. That is why the
Commission proposed in 2020 a “Regulation on digital operational resilience for the
financial sector”111
that seek to foster digital operational resilience at EU level for all
regulated financial institutions, including insurers and reinsurers. This proposal aims at
reducing the cyber incidents and enhancing the capabilities of financial institutions to
111
The regulation on digital operational resilience in the financial sector will add additional safeguard to the
existing rules in the Solvency II Directive regarding the mitigation of operational risk and in EIOPA Guidelines
on information and Communication Technology Security and Governance, published in 2020, providing
clarification on the minimum expected information and cyber security capabilities, to ICT security and
governance.
Page | 279
withstand them. That important issue is therefore already dealt with but outside the scope of
the Solvency II review.
Insurers also offer protection against cyber events. In order to collect better data in this
regard, EIOPA has the empowerments and has indeed proposed to introduce a new reporting
template for cyber risk which will require insurance companies to report data on cyber risk
underwriting. The introduction of new reporting templates (to be included in the general
Reporting ITS prepared by EIOPA) should be adopted next year. No change to the Solvency
II Directive or its Delegated Regulation are needed to introduce that new template.
In addition, the Cyber underwriting strategy published by EIOPA112
in 2020 sets out the
conditions which are essential for a resilient cyber insurance market, including the need for
an adequate level and quality of data on cyber incidents available at European level. The
access to cyber incident database(s), potentially a European Database, could enhance the
further development of the European cyber insurance industry, and would be the topic of
future policy proposals.
It should also be noted that insurers are already required to assess the above mentioned ICT
risks, including cybersecurity, as part of their ORSA (own risk and solvency assessment)
which identifies the overall solvency needs related to the specific risk profile of an
undertaking. In the public consultation, civil society claimed that these risks needed to be
reflected by introducing enhanced requirements for monitoring ICT risks. However, as
mentioned above, this issue as well as other digital transformation challenges are already
addressed by the regulation on digital operational resilience and covered in the Request to the
ESAs for technical advice on digital finance and related issues (Call for Advice, 02/02/2021).
Conclusion: Insurers’ investments in sustainable activities remain limited. If this
problem is not addressed, the Commission will not be in a position to ensure a sustainable
and green recovery from the ongoing Covid-19 crisis. The lack of prudential incentives for
insurers to make long-term sustainable investments as well as a lack of clarity of obligations
on the management and taking into account of climate and environmental risks may be
reasons why insurers’ contribution to the objectives of the European Green Deal and the
Capital Markets Union remains limited at this stage. Finally, while the Solvency II
framework is already neutral with respect to many digital developments, several digital
transformation challenges are tackled in parallel by horizontal workstreams, as well as
through EIOPA’s engagement in several data projects and continuing work to deliver advice
on digital finance, together with the other ESAs and the ECB.
112
Cyber underwriting strategy | Eiopa (europa.eu)
Page | 280
6.4. Coherence
Summary assessment:
The interaction of the Solvency II framework with other parts of legislation is limited as
Solvency II is self-standing and by itself replacing a patchwork of 14 former Directives.
Further, while it focuses on the prudential dimension and policyholder protection by
ensuring that insurers have sufficient capital to meet their obligations, the Solvency II
Directive is very broad, encompassing also requirements for insurance groups.
However, the current provisions of the framework do not seem to be effective in a way
that corresponds to the objectives of the renewed Action Plan on the Capital Markets
Union: issues of insufficient volatility mitigation, impacting the insufficient effect of the
framework on long-term investment by the insurers. The same holds for “green
investment” and the European Green Deal.
From an international point of view, Solvency II is one of the most advanced standards
at international level. On the other hand, the current lack of harmonised framework for
coordination and management of crisis situations, including to address potential
systemic risk, is not consistent with the objectives set at international level by the IAIS
and the FSB.
6.4.1. How does the Directive interact with other (possibly new) EU
instruments/ legal frameworks? Are there newly created overlaps, gaps or
contradictions?
The interaction of the Solvency II Framework with other parts of legislation is
limited as the Solvency II Directive is self-standing and by itself replacing a patchwork of 14
former Directives. It therefore brings coherence into this part. Further, while it focuses on the
prudential dimension and policyholder protection by ensuring that insurers have sufficient
capital to meet their obligations, the Solvency II Directive is very broad, encompassing also
groups.
Motor Insurance Directive and Insurance Distribution Directive
The Motor Insurance Directive deals with a particular category of insurance and in particular
its cross-border dimension from the point of view of a potential victim of an accident caused
by a motor vehicle. The Motor Insurance Directive assures a minimum level of coverage of
the insurance policies within Europe and deals with special provisions regarding accidents
caused by uninsured vehicles as well as the cross-border dimension of accidents. As to the
Insurance Distribution Directive, it deals with transparency and information, which needs to
be disclosed to the potential policyholder during the distribution process. Those directives are
posterior to the Solvency II Framework, and therefore have to ensure coherence with the
latter.
Page | 281
Financial Conglomerates Directive
When the “Financial Conglomerates Directive” (FICOD)113
was adopted, it aimed to provide
supplementary supervision for complex large groups. It supplemented the relevant sectorial
frameworks then existing: the “Capital Requirements Directive” (CRDIII) and the various
insurance directives. However, the sectorial legislation has been significantly overhauled in
recent years with the adoption of CRR/CRD IV and the Solvency II Directive, as well as in
the securities sector. The enhanced supervisory framework at sectorial level may have
diminished the supervisory relevance of FICOD, and may have also created issues with the
coherence of the supervisory frameworks across the sectors and FICOD. As FICOD builds on
sectorial legislation, the question of coherence was already dealt with during the review of
FICOD. In particular, it was noted that the effectiveness of FICOD to ensure the financial
stability of financial conglomerates may be undermined by its silence in the area of
resolution.114
We refer to the according Staff Working Document.115
Digital Finance Strategy
Digital transformation is a horizontal issue. The recently adopted Digital Finance Strategy
has identified the main priorities for the EU and these priorities are also relevant for the
insurers and reinsurers. In that context, the Commission invited EIOPA (as well as the other
European Supervisory Authorities) to provide technical advice on digital finance (with a final
report due for 31 January 2022), notably on (i) the new material developments in the
evolution and fragmentation of value chains of single financial services driven by
technological innovation and the entry of new market participants, (ii) monitoring online
services and (iii) risk related to mixed activity groups involving large technology companies.
If necessary, Commission services will propose targeted amendments to the financial services
acquis, including the Solvency II framework (possibly via a cross-sectoral proposal) but the
need for a legislative change (as opposed to what can be done through EIOPA’s guidelines) is
yet to be identified.
Capital Markets Union
However, the current provisions of the framework do not seem to be effective in a way that
corresponds to the objectives of the renewed Action Plan on the Capital Markets Union. We
have discussed in the effectiveness and relevance sections the issues of insufficient volatility
mitigation, impacting the insufficient effect of the framework on long-term investment by the
insurers. For this reason, the renewed Action Plan acknowledges that insurers’ investments
are instrumental in supporting the long-term financing of the economy and that prudential
rules are not yet fully adequate to remove unjustified barriers to equity investments.
113
Directive 2011/89/EU of the European Parliament and of the Council of 16 November 2011 amending
Directives 98/78/EC, 2002/87/EC, 2006/48/EC and 2009/138/EC as regards the supplementary supervision
of financial entities in a financial conglomerate (EUR-Lex link).
114
Respondents to the related public consultation (link to the consultation page) mainly argued that it would be
premature to consider any resolution framework for financial conglomerates while there is a gap in this
area on the insurance side. Additionally, many respondents highlighted that the development of
robust sectorial regimes would be sufficient in ensuring a sound resolution framework for groups,
including financial conglomerates.
115
https://ec.europa.eu/info/sites/info/files/ficod_swd_2017_272_en.pdf .
Page | 282
European Green Deal, Renewed Sustainable Finance Strategy and Non-Financial
Reporting Directive
The same holds for “green investment”. The Communication on the European Green Deal
states that climate and environmental risks should be managed and integrated into the
financial system. The renewed sustainable finance strategy (RSFS) that the Commission will
adopt to this end in 2021 should be coherent with the Solvency II framework, including with
the reviewed provisions. In addition, the same communication underlines that the
Commission intends to review the “Non-Financial Reporting Directive” (NFRD)116
the
scope of which goes beyond the insurance sector, in order to extend “green” disclosure
requirements to all types of financial market participants through one single piece of
legislation. Therefore, a review of the Solvency II framework should avoid overlapping
disclosure requirements for insurers in different Directives. Several current Commission
initiatives, with a significant impact on the insurance sector, aim to increase private financing
of the transition to a carbon-neutral economy and to ensure that climate and environmental
risks are managed by the financial system. Besides the renewed sustainable finance strategy
and the review of the NFRD, the “taxonomy regulation”117
creates a common language for
the identification of sustainable activities. An on-going initiative aims to develop technical
screening criteria for the taxonomy in a delegated act. It is probable that the delegated act will
contain sectoral criteria for underwriting by non-life insurance and reinsurance companies.
6.4.2. Is it coherent with international developments/ international initiatives?
Solvency II is one of the most advanced standards at international level, and several
jurisdictions, in particular in Asia, are in the process of incorporating (some of) the European
rules in national legislations. In addition, the draft “insurance capital standard” (ICS) -
developed by the International Association of Insurance Supervisors - is very consistent with
Solvency II, although the design of the international standard is overall less conservative. The
ICS is not yet formally adopted and currently subject to a 5-year monitoring period (until
2024), which means that the Solvency II review should be completed before the finalisation
of the ICS in 2024. If eventually adopted by other jurisdictions, the ICS with its risk-based
approach will improve the global level-playing field.
However, as explained in section 6.3.2, the current lack of harmonised framework for
coordination and management of crisis situations, including for the largest European insurers
with international activities and potential systemic footprint (IAIGs), is not consistent with
the objectives and standards developed at international level by the International Association
of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB). Indeed, the IAIS
considers pre-emptive recovery planning as necessary and at least for IAIGs, and the FSB
requires resolution planning for insurers that could be systemically significant or critical if
they fail. Both imply a set of appropriate resolution powers.
116
Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending
Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large
undertakings and groups, OJ L 330, 15.11.2014, p. 1
117
Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the
establishment of a framework to facilitate sustainable investment, and amending Regulation (EU)
2019/2088, OJ L 198, 22.6.2020, p. 13.
Page | 283
6.5. EU added value
Summary assessment:
Overall, the Solvency II framework has clear added value by providing a harmonised
and sound prudential framework. Because of their scale and generalised effects, the
problems clearly requested further EU intervention, as an integrated EU insurance
market and a level-playing field for EU insurers require harmonisation, both technical
(e.g. calculation of technical provisions, risk-sensitive solvency standards) and
operational (e.g. supervisory methods and tools). On this basis, the framework has
promoted comparability, transparency and competitiveness. It has also significantly
enhanced the protection of policyholders and beneficiaries, by limiting the likelihood
that their insurer fails, as well as increasing transparency on the risks their insurer is
facing. Solvency II has also facilitated supervisory convergence within the Union and
contributed to the integration of the Single Market for insurance services.
However, the assessment suggests weaknesses in supervisory convergence and
cooperation which clearly hinder the effectiveness of the framework in terms of
competitiveness and integration of the EU market and, in particular in the case of cross-
border activities, lead to insufficient or unequal policyholder protection in case of
failure. In addition, there is no harmonised and coordinated approach of safety nets in
the form of insurance guarantee schemes that would protect policyholders and
beneficiaries in case of failure.
6.5.1. Compared to the previous national approaches, has Solvency II resulted
in a more consistently applied regime across all Member States?
• Has it facilitated the integration of the EU insurance market and supported the
competitiveness of EU insurers compared to a scenario without the Solvency II
framework?
The obstacles to a fully-functioning integrated EU market for insurance clearly
requested further EU intervention. Indeed, while preserving the “principle-based” nature of
the framework, an integrated EU insurance market and a level-playing field for EU insurers
require harmonisation, technical (e.g. calculation of technical provisions, risk-sensitive
solvency standards) and operational (e.g. supervisory methods and tools). Only an EU action
could ensure the uniform application of the regulatory provisions and guarantee the existence
of the well-established regulatory framework regarding the taking up and the pursuit of
(re)insurance and business. In addition, at the time Solvency II was prepared, the IAIS was
also developing new solvency standards and valuation rules of technical provisions, therefore
moving towards a risk-based and market-consistent approach. Likewise, Basel II had
introduced a more risk sensitive capital regime in the banking sector. This lack of
international and cross-sectoral convergence was a risk to the competitiveness of insurers,
while also increasing the opportunities of regulatory arbitrage.
The Solvency II framework therefore contributed to a more level-playing field within the
European Union. Uniform conditions for the calculation of technical provisions ensure that
Page | 284
insurance liabilities are valued in a consistent way, of both a domestic insurer and an insurer
offering the same insurance product cross-border via FoS/FoE. This is a precondition for the
functioning of an integrated market, as price differences merely on valuation techniques
should not be possible. It increased product comparability and transparency for policyholders.
The result is an effective price competition leading finally to good consumer outcomes.
However, despite the progress in the field of market integration regarding harmonised rules
for the supervision of insurance undertakings and the valuation of technical liabilities, the
market remains fragmented in other aspects.
Regarding the competitiveness of EU insurers operating in third countries, the Solvency II
framework offers the possibility according to article 227 of the Directive for equivalence
decisions, i.e. in case of a positive equivalence decision an EU insurer operating in a third
country could use the local rules relating to capital requirements, and would not have to
calculate them according to the Solvency II rules.
• Has it better enhanced policyholders’ protection?
As assessed earlier and recalled in the above section, thanks to its EU-wide dimension,
the Solvency II framework has enhanced policyholders’ protection through better
information, transparency and comparability and by providing incentives for better risk-
management which also resulted in lower probability to fail. It improved supervisory
convergence and coordination, with a similar result of better risk management and less
failures or near misses. However, the supervisory convergence process has not reached an
optimal outcome, and some lack of clarity can entail divergent supervisory decisions. This
leaves policyholders (and other stakeholders) with still too many uncertainties. In addition,
there are no harmonised rules regarding the failure of an insurer so that it can happen that the
Member State of residence of a policyholder is primarily relevant for the question regarding
the responsibility of insurance guarantee schemes. Discrimination of policyholders based on
their place of residence in the case of an insurance failure was and still is a problem.
• Has it fostered growth and recovery better than a “no-Solvency II” scenario?
The Solvency II regime eliminated previous restrictions imposed by Member States on
the composition of insurers' investment portfolios. Instead, insurers must invest according to
the “prudent person principle” and their capital requirements depend on the actual risk of
investments. Besides the impact on risk management, an objective of the Solvency II
Directive was to facilitate a better allocation of capital resources at firm level, at industry
level, and within the EU economy, and it has been reinforced by the Delegated Regulation’s
objective to foster growth through the promotion of long-term investment. From a prudential
perspective, a long-term perspective encompasses the possibility for insurers to avoid forced
selling under stressed market conditions. Based on EIOPA’s statistics, insurers are already
largely investing in long maturity debt, bonds and loans. The trend has improved in the recent
years since the entry of application of the Solvency II framework in 2016.
However, insurers have been retrenching from equity investments over the past twenty years
and this trend has not been reversed since 2016. And the investments share of the insurance
sector in the real economy and infrastructure has remained limited. Even the recent several
Page | 285
amendments to Solvency II, through preferential treatments for certain classes of long-term
assets, have not seem adequately designed to succeed in dampening this reported
disincentive. Without further changes - taking into account the necessity of adequately
assessing the risk while ensuring enough investments in the EU economy - the level of equity
investments by insurers would remain far below its level at the beginning of the 21st
century.


EN EN
EUROPEAN
COMMISSION
Brussels, 22.9.2021
SWD(2021) 260 final
PART 1/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the documents
Proposal for a Directive of the European Parliament and of the Council
amending Directive 2009/138/EC as regards proportionality, quality of supervision,
reporting, long-term guarantee measures, macro-prudential tools, sustainability risks,
group and cross-border supervision
and
Proposal for a Directive of the European Parliament and of the Council establishing a
framework for the recovery and resolution of insurance and reinsurance undertakings
and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and
Regulations (EU) No 1094/2010 and (EU) No 648/2012
{COM(2021) 581 final} - {SEC(2021) 620 final} - {SWD(2021) 261 final}
Europaudvalget 2021
KOM (2021) 0581 - SWD-dokument
Offentligt
EN EN
Table of contents
1. INTRODUCTION...................................................................................................................2
1.1. Political and legal context .................................................................................2
1.2. High-level overview of the main issues that the Solvency II review will
aim to address....................................................................................................3
2. PROBLEM DEFINITION.......................................................................................................5
2.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy.............................................................6
2.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies ..............................8
2.3. Insufficient proportionality of the current prudential rules generating
unnecessary and unjustified administrative compliance costs for small and
less complex insurers.......................................................................................10
2.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’
failures.............................................................................................................11
2.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector ............................................................... 13
2.6. How will the problems evolve if not addressed? ............................................13
3. WHY SHOULD THE EU ACT?...........................................................................................15
3.1. Legal basis.......................................................................................................15
3.2. Necessity and Added Value of EU action.......................................................16
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?..................................................................17
4.1. General objectives ...........................................................................................17
4.2. Specific objectives...........................................................................................18
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?.......................................................19
5.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy...........................................................19
5.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies ............................20
5.3. Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs for small and less
complex insurers.............................................................................................. 20
5.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’
failures.............................................................................................................22
5.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector ............................................................... 23
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO THEY
COMPARE?..........................................................................................................................23
6.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy...........................................................24
EN EN
6.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies ............................34
6.3. Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs for small and less
complex insurers.............................................................................................. 43
6.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’
failures.............................................................................................................52
6.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector ............................................................... 65
7. PREFERRED COMBINATION OF OPTIONS ...................................................................74
7.1. General impacts............................................................................................... 77
7.2. Impact on SMEs.............................................................................................. 80
7.3. REFIT (simplification and improved efficiency)............................................80
8. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?....................81
ANNEX 1: PROCEDURAL INFORMATION .............................................................................83
1. LEAD DG, DECIDE PLANNING/CWP REFERENCES....................................................83
2. ORGANISATION AND TIMING........................................................................................83
3. CONSULTATION OF THE RSB.........................................................................................83
4. EVIDENCE, SOURCES AND QUALITY...........................................................................84
ANNEX 2: STAKEHOLDER CONSULTATION........................................................................87
1. INTRODUCTION.................................................................................................................87
2. CONSULTATION STRATEGY...........................................................................................87
3. CONFERENCE ON SOLVENCY II ....................................................................................87
4. INCEPTION IMPACT ASSESSMENT................................................................................88
Priorities of the Solvency II Review ............................................................... 88
Long termism and sustainability .....................................................................88
Volatility and proportionality..........................................................................88
Recovery, resolution, IGS, group supervision and cross-border supervision .89
5. PUBLIC CONSULTATION .................................................................................................89
Long-termism and sustainability of insurers’ activities and priorities of the
European framework .......................................................................................89
Proportionality of the European framework and transparency towards the
public...............................................................................................................90
Improving trust and deepening the Single Market in insurance services........91
New emerging risks and opportunities............................................................92
Additional or late feedback to the consultation...............................................92
6. TARGETED CONSULTATIONS OF MEMBER STATES................................................93
ANNEX 3: WHO IS AFFECTED AND HOW?............................................................................95
1. PRACTICAL IMPLICATIONS OF THE INITIATIVE.......................................................95
2. SUMMARY OF COSTS AND BENEFITS OF THE COMBINED SET OF OPTIONS...102
EN EN
3. SUMMARY OF COSTS AND BENEFITS PER PROBLEM............................................109
Problem 1: Limited incentives for insurers to contribute to the long-term
financing and the greening of the European economy..................................109
Problem 2: Insufficient risk sensitivity and limited ability of the framework
to mitigate volatility of insurers’ solvency position......................................111
Problem 3: Insufficient proportionality of the current prudential rules
generating unnecessary administrative and compliance costs ......................113
Problem 4: Deficiencies in the supervision of (cross-border) insurance
companies and groups, and inadequate protection of policyholders against
insurers’ failures............................................................................................ 115
Problem 5: Limited specific supervisory tools to address the potential
build-up of systemic risk in the insurance sector ..........................................120
ANNEX 4: PROPORTIONALITY AND SIMPLIFICATION MEASURES .............................123
ANNEX 5: DISCUSSION ON THE TECHNICAL DESIGN OF THE MINIMUM
HARMONISING RULES IN RELATION TO INSURANCE GUARANTEE
SCHEMES (IGSS) ..............................................................................................................124
1. BACKGROUND.................................................................................................................124
2. INTRODUCTION...............................................................................................................125
A fragmented landscape ................................................................................125
The failure of insurance companies............................................................... 127
The default likelihood of insurers .................................................................131
Estimates of potential losses associated with the failures of insurance
companies......................................................................................................133
Objectives of an EU action............................................................................136
3. ANALYSIS OF POLICY OPTIONS ..................................................................................137
The need for harmonisation of national IGSs in the European Union ..........139
The harmonisation of the design of national IGSs........................................141
4. ARE THERE ALTERNATIVE TO SPECIFIC EU ACTION ON IGS?............................159
5. CONCLUSIONS .................................................................................................................160
ANNEX 6: ANALYTICAL METHODS.....................................................................................162
ANNEX 7: IMPACT ASSESSMENT OF TECHNICAL TOPICS THAT WERE NOT
EXPLICITLY COVERED BY THE MAIN BODY OF THE IMPACT ASSESSMENT..163
1. SAFEGUARDS IN THE USE OF INTERNAL MODELS ................................................163
Problem definition.........................................................................................163
What are the available policy options?..........................................................164
What are the impacts of the options and how do they compare?..................164
2. REPORTING AND DISCLOSURE REQUIREMENTS....................................................167
Background and problem definition.............................................................. 167
What are the available policy options?..........................................................170
What are the impacts of the options and how do they compare?..................171
ANNEX 8: “ZOOMING” ON SOME ISSUES COVERED IN THE IMPACT ASSESSMENT176
EN EN
1. STRENGTHENING “PILLAR 2” REQUIREMENTS IN RELATION TO CLIMATE
CHANGE AND SUSTAINABILITY RISKS.....................................................................176
2. REDUCING UNDUE VOLATILITY IN SOLVENCY II..................................................178
Revising the volatility adjustment................................................................. 178
Revising the symmetric adjustment on equity risk .......................................179
3. BALANCING THE CUMULATIVE IMPACT OF THE REVIEW ON CAPITAL
REQUIREMENTS ..............................................................................................................181
Achieving the balance partly through phasing-in periods............................. 181
Achieving the balance partly through “compensating measures”.................182
4. ENHANCING GROUP SUPERVISION............................................................................185
Strengthening and harmonising supervisory powers towards groups...........185
Clarifying prudential rules on capital requirements......................................190
5. ENHANCING SUPERVISION OF CROSS-BORDER INSURANCE COMPANIES .....196
Ensuring more efficient information gathering/exchange during the
authorisation process and ongoing supervision.............................................197
Improving cooperation between Home and Host supervisory authorities,
under the coordination/mediation of EIOPA.................................................201
6. INCORPORATING A MACRO-PRUDENTIAL DIMENSION IN SOLVENCY II ........204
ANNEX 9: OTHER INITIATIVES THAT WILL HAVE A MATERIAL IMPACT ON THE
INSURANCE SECTOR......................................................................................................210
ANNEX 10: EVALUATION OF THE SOLVENCY II FRAMEWORK ...................................212
EN EN
Glossary
Term or acronym Meaning or definition
CMU Capital Markets Union
EEA European Economic Area
EIOPA European Insurance and Occupational Pensions Authority
ESRB European Systemic Risk Board
EU European Union
FoE / FoS Freedom of establishment / Freedom of services
DG FISMA
Directorate General for Financial Stability, Financial Services and Capital
Markets Union
FSB Financial Stability Board
GWP / GDWP Gross written premiums / ¨Gross direct written premiums
Home authority National Supervisory authority which granted licensing to an insurer
Home Member State Member State where an insurance or reinsurance company obtained its license
Host authorities National supervisory authorities other than the Home authority of the Member
States where an insurance or reinsurance company is operating
Host Member State
Member States other than the Home Member State where an insurance or
reinsurance company is operating
IAIG(s) Internationally Active Insurance Group(s)
IAIS International Association of Insurance Supervisors
IGS(s) Insurance Guarantee Scheme(s)
Insurance / Insurer
Unless otherwise specified, the use of the term insurance refers to both
insurance and reinsurance activities
MCR Minimum Capital Requirement
NCA / NCAs National Competent Authority / National Competent Authorities
NSA / NSAs National Supervisory Authority / National Supervisory Authorities
ORSA Own risk and solvency assessment
RSR(s) Regular supervisory report(s)
SCR Solvency capital requirement
SFCR(s) Solvency and financial condition report(s)
Solvency ratio Ratio of capital resources to solvency capital requirement
VA Volatility adjustment
Page | 1
The three “pillars” of Solvency II
Solvency II constitutes a three-pillar framework (capital requirements, governance,
transparency), which is risk-based and market-based.
The “Pillar 1” sets out quantitative requirements, including the market-based rules to
value assets and liabilities, the general design of capital requirements. The capital
requirements are risk-based, forward-looking and economic, i.e. tailored to the specific
risks borne by each insurer and taking into account risk diversification benefits, allowing
an optimal allocation of capital across the EU.
The framework is designed in such a way that an insurer complying with its requirements
is supposed to be able to cope with an extreme adverse event, whose probability of
occurrence is only 1 in every 200 years. In other words, the insurer is then supposed to be
able to meet its obligations to policyholders and beneficiaries over the 12 following
months, with a 99.5% probability. Hence, where the insurer complies with these risk
management rules, the risk of an insurance failure over the following year should reach a
very low probability (even though not null).
The “Pillar 2” consists of requirements for the governance and risk management of
insurers, as well as the details of the effective supervisory process with competent
authorities. A key Pillar 2 requirement is the “own risk and solvency assessment”
(ORSA). It aims at supporting insurers to get a holistic view of its risk profile and
understand how risks affect the future solvency situation. It requires that the insurer
undertakes its own “stress testing”, integrating all foreseeable risks such as a volatile and
uncertain economic outlook. It also implies that insurers, when defining their own “risk
appetite”, may (shall) look beyond the “purely quantitative” solvency requirements, and
set level of “reserve”/available capital that are also forward-looking, as an additional
cushion beyond the minimum regulatory quantitative requirements.
Finally, the “Pillar 3” focuses on reporting to supervisory authorities and disclosure to
the public, thereby enhancing market discipline and increasing comparability.
Page | 2
1. INTRODUCTION
1.1. Political and legal context
The economic and social importance of insurance is such that intervention by public
authorities, in the form of prudential supervision, is generally accepted to be necessary.
Not only do insurers provide protection against future events that may result in a loss,
they also channel household savings into the financial markets and into the real economy.
With trillions of assets under management, the insurance sector remains a mainstay of the
European financial industry.
The rationale for EU insurance legislation1
is to facilitate the development of a Single
Market in insurance services, whilst at the same time securing an adequate level of
consumer protection.
The Directive on the taking-up and pursuit of the business of insurance and reinsurance
(Directive 2009/138/EC) is also known as the Solvency II Directive. The Solvency II
Directive, as amended by the Omnibus II Directive (Directive 2014/51/EU), has entered
into application in 2016. The supplementing Delegated Regulation (EU) 2015/35 was
intended to further specify a range of aspects of the Solvency II Directive, with the aim to
facilitate a consistent implementation throughout the European Union. Those two levels
of legislation form the ‘Solvency II framework’, or regime. The Solvency II regime
replaces fourteen existing directives commonly known as 'Solvency I'.
The European Commission has a legal mandate to conduct a comprehensive review of
the pivotal components of the Solvency II Directive by the end of 2020. This review is an
opportunity to draw the lessons learned from five years of implementation of the
Solvency II framework, including in crisis situations such as the one triggered by the
Covid-19 outbreak, and to take into account the feedback received from insurers,
consumers and public authorities. In order to appropriately take stock of the potential
shortcomings in prudential rules, which have been highlighted by the pandemic crisis, the
timeline of the review had to be extended by six months.
Finally, the review of the framework needs to be coherent with the political priorities of
the European Union. In particular, both the renewed Capital Markets Union (CMU)
Action Plan and the communication on the European Green Deal explicitly refer to
insurers as key institutional investors whose role will be instrumental to the so-called “re-
equitisation” in the corporate sector and the greening of the European economy.
The European Parliament and the European Council also identify the Solvency II Review
as a pivotal initiative to support the objectives of the CMU. The European Parliament’s
report on further development of the CMU of 16 September 2020 requests the
Commission to assess, on the basis of an impact assessment, the potential benefits and
prudential justification of adjusting capital requirements for investments in businesses,
notably of small and medium-sized enterprises (SMEs) to ensure that capital
requirements for insurers do not discourage long-term investments. The Council
Conclusions of 2 December 2020 on the Commission’s CMU Action Plan urges the
Commission, to prioritise and to accelerate its work in parallel on strengthening the role
of insurers as long term investors and assessing ways to incentivise long-term
investments in corporates and particularly SMEs without endangering financial stability
or investor protection and ensuring risk adequate regulatory treatment of long term
investments.
1
For the purpose of this impact assessment, and unless stated otherwise, the term “insurance” will refer to
both “insurance” and reinsurance”.
Page | 3
At this stage, the Commission is pursuing several initiatives to increase private financing
of the transition to a carbon-neutral economy and to ensure that climate and
environmental risks are managed by the financial system. Those initiatives, which are
listed in Annex 9, will have a significant impact on the insurance sector.
Other horizontal EU political priorities are being tackled in parallel, without having yet
identified the need for a legislative change. For instance, the recently adopted Digital
Finance Strategy has defined the main priorities for the EU and these priorities are also
relevant for insurers and reinsurers. In that context, the Commission invited the European
Supervisory Authorities (ESas), including EIOPA, to provide technical advice on digital
finance. If necessary, Commission services will propose targeted amendments to the
financial services acquis, including the Solvency II framework (possibly via a cross-
sectoral proposal).
Following a formal request for advice that was sent by the European Commission to the
European Insurance and Occupational Pensions Authority (EIOPA) in February 2019,
EIOPA conducted three technical consultations covering the 19 topics of the Solvency II
review that were identified by the European Commission. It also conducted two data
collection exercises in order to quantify the cumulative impact of all policy proposals.
EIOPA’s final Opinion on the Solvency II review, and the associated background
analysis and holistic impact assessment, were published on 17 December 2020. The
Commission services’ impact assessment largely leverage on the technical work and
analysis conducted by EIOPA.
1.2. High-level overview of the main issues that the Solvency II review will aim
to address
Since 2016 when it entered into application, the Solvency II Directive has provided a
harmonised and sound prudential framework for insurance and reinsurance
companies in the EU, as evidenced in the Evaluation Annex. Based on the risk profile
of individual firms, it promotes comparability, transparency and competitiveness.
Solvency II has significantly enhanced the protection of policyholders and beneficiaries,
by limiting the likelihood that their insurer fails. It has also provided strong incentives for
insurers to better measure and manage their risks, and to improve their internal
governance. Under the coordination of the European Insurance and Occupational
Pensions Authority (EIOPA), Solvency II has also facilitated supervisory convergence
within the Union and contributed to the integration of the Single Market for insurance
services.
Also thanks to Solvency II, the European insurance industry remained robust overall.
With average levels of capital resources that remain more than twice as high as what is
required by the legislation, insurers’ solvency position has so far proved to be sufficiently
solid to weather the economic and financial consequences of the Covid-19 outbreak2
.
However, due to the high level of uncertainty in the economic and financial outlook,
regulators and supervisors still have to closely monitor future market developments.
The primary objective of Solvency II is the protection of policyholders. Achieving this
objective requires that insurance companies are subject to effective solvency
requirements based on the actual risks they are facing (“risk-based” framework). The
framework is defined in such a way that the risk of an insurance failure over the
following year, even though not null, is of very low probability, as an insurer complying
2
The reasons why insurers’ solvency ratios are on average far above the 100% “regulatory target” are
provided in Sub-section 6.1.1 of the Evaluation Annex.
Page | 4
with its requirements is supposed to be able to cope with an extreme adverse event whose
probability of occurrence is only 1 in every 200 years. The framework also relies on full
market-based valuation of insurers’ assets and liabilities, which allows monitoring the
impact of economic and financial conditions on insurers’ solvency in real time and on an
ongoing basis.
However, the market value and risk-based principles also raise some challenges.
First, with regard to market risks faced by insurers, the risk-based approach implies that
the definition of capital requirements on investments only depends on the relative
riskiness of each asset over a one-year time horizon. Therefore, prudential rules do not
take into account the instrumental role of insurers in financing long-term sustainable
growth in the Union and in the economic recovery in the aftermath of the Covid-19
crisis. Both the European Green Deal and the Capital Markets Union Action Plan make
this observation.
While Solvency II is not the main driver of insurers’ investments, the framework may
still provide disincentives to invest in assets such as equity, as insurance firms have to set
aside more capital when holding such assets whose prices are generally more volatile
than fixed-income securities. In addition, current rules do not capture the lower long-term
risk of environmentally sustainable (“green”) activities/assets (all else equal). Hence, it
should be explored whether barriers to long-term sustainable investments are unjustified
and could be eliminated so as to facilitate insurers’ contribution to the financing of long-
term sustainable growth, while preserving an appropriate level of policyholder
protection.
Second, in order to be effective in protecting policyholders, the framework needs to be
regularly updated, so that it appropriately captures all risks that insurers are facing due to
structural changes in financial markets. At this stage, Solvency II provisions and
parameters may prove to be outdated, as they do not reflect key trends, such as the
protracted low – and even negative – interest rates environment, and its consequences.
Finally, reliance on market values can generate high volatility in the solvency position of
insurers. Such volatility may unduly foster procyclical behaviours and short-termism in
their underwriting and investment activities, although insurers are supposedly “long-term
oriented” by nature. In particular, it can provide disincentives to the supply of (life)
insurance products with guarantees, which are still highly sought by EU citizens, in
particular for their pensions.
In addition to the issues stemming from market valuation and risk-based rules, the
review of Solvency II should aim to address other challenges.
Solvency II is a highly sophisticated framework, which provides strong incentives for
robust risk management by insurers. However, the framework can prove to be very
complex, and its implementation generates significant compliance costs, in particular for
smaller insurers. Solvency II embeds an overarching principle of proportionality, which
supposedly ensures that both the requirements imposed to companies and the intensity of
supervisory activities by public authorities are commensurate to the “nature, scale and
complexity” of the risks of each firm. However, in practice, this overarching principle is
abstract and results in legal uncertainties and insufficient visibility for both national
supervisory authorities (NSAs) and companies, as the framework neither specifies what
the proportionate measures are nor clarifies the scope of firms that are eligible for such
proportionality. Hence, at this stage, the implementation of proportionality is insufficient
to effectively reduce the regulatory burden for smaller insurers.
Page | 5
Solvency II has facilitated the integration of the Single Market for insurance services by
improving the level-playing field and supervisory convergence. However, recent failures
of insurance companies, which operated mainly outside the Member State where they
were initially granted authorisation, highlighted shortcomings and deficiencies in the
quality and coordination of insurance supervision, including of cross-border insurance
groups. In addition, it also confirmed that policyholders are not consistently protected
across the European Union in the event that their insurer fails, in particular in a cross-
border context. Indeed, national resolution regimes are mostly incomplete and
uncoordinated, and the patchwork of national insurance guarantee schemes (IGSs), which
are expected to act as a safety net to pay policyholders’ claims in the event of their
insurer’s insolvency, can leave some policyholders without any protection.
Finally, while policyholder protection is the primary objective of Solvency II, regulators
and supervisors also have to preserve financial stability according to the Directive. To
this end, supervising insurers on an individual basis (“micro-prudential supervision”)
may not allow addressing systemic risks in the insurance sector, since it does not really
take into account their interconnections with other market participants and common risky
(herding) behaviours among insurers. While some regulatory tools embedded in
Solvency II already contribute to this objective, they may be insufficient and too narrow
in terms of scope to effectively prevent the build-up of systemic risk in the insurance
sector.
2. PROBLEM DEFINITION
The need for amending the Solvency II framework in order to either introduce new
provisions or to review the existing ones has emerged as a result of both the conclusions
of the evaluation of the Solvency II Directive (see Annex 10), and the outcome of the
public consultation that was conducted between 1 July and 21 October 2020 (see Annex
2).
This section presents the most important problems addressed by this impact assessment.
Those problems are further identified and assessed as part of the Evaluation Annex.
Please also refer to Annex 7 for specific discussions on internal models and on reporting
and public disclosure, which fall under the broader issue of quality of supervision (See
2.4) but will not be assessed as such in the core part of the Impact assessment due to size
limitations.
Figure 1 summarizes the problems and problems drivers as well as their related
consequences. Regarding the links between problems and consequences, the solid arrows
correspond to the primary links whereas the dotted arrows correspond to the secondary
links.
Page | 6
Figure 1: Problem tree
2.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy
The main focus of Solvency II is policyholder protection and financial stability. To that
end, Based on quantitative data (e.g. historical price and volatility behaviour of financial
assets), it defines capital requirements, i.e. the amount of capital resources that insurers
have to set aside in order for them to be able to cope with very extreme adverse events
(1-year duration shocks whose probability of occurrence is only once in 200 years).
Higher capital requirements on investments are therefore applied to assets, which are
more volatile and/or more risky, for instance equity. However, since Solvency II was
adopted, the European Commission set additional political objectives, notably the need to
build-up a Capital Markets Union which can channel more funding to businesses and the
European Green Deal to achieve a transition to carbon-neutrality. The capital
requirements of Solvency II do not take into account the positive externalities of some
investments in strengthening long-term sustainable growth and the economic recovery in
the aftermath of the Covid-19 crisis and the limitation of the negative impact of climate
change.
Limited incentives for insurers to contribute to the long-term financing of the economy
For the purpose of this impact assessment, the objective of fostering long-term
investments will be actually related to the equity asset class only, since insurers are
already largely investing in long-maturity bonds, as discussed in Sub-section 6.1.4 of the
Evaluation Annex.
In addition, the concept of long-term investment has no commonly agreed definition. It
cannot be restricted to “buy-and-hold” strategies. For the purpose of this impact
Page | 7
assessment, a long-term investment will be deemed an investment in an asset class (and
not individual assets) with a long-term perspective (the Solvency II Delegated Regulation
refers to a 5-year time horizon for long-term equity investments), including under
stressed conditions. In other words, an insurer is deemed to make a long-term investment
in equity if it can have a long-term perspective to hold a certain share of its investment
portfolio in equities (listed, unlisted, private equity, etc.), even if it does some arbitrage
operations from time to time (i.e. realising gains on certain equities and investing in other
ones). From a prudential perspective, a long-term perspective encompasses the
possibility for insurers to avoid forced selling under stressed market conditions.
The Capital Markets Union Action Plan underlined the instrumental role that insurers can
play in the “re-equitisation” and long-term financing of the European economy. Insurers
can hence support the economic recovery in the aftermath of the Covid-19 crisis. As
shown in the Evaluation Annex, Solvency II, which only entered into application in
2016, is not the main driver of insurers’ investments, since the downward trend in equity
investments dates back to the beginning of the 21st
century. The Commission made
several amendments to the Solvency II Delegated Regulation to help insurers contribute
to the long-term financing of the European economy, in particular by introducing a
preferential treatment for long-term investments in equity, subject to some criteria3
.
However, those amendments are not sufficiently effective and the framework still
includes disincentives to investments in assets such as equity, as insurance firms have to
set aside more capital when investing in more volatile assets. To achieve the political
objective of facilitating insurers’ role in sustaining the economic recovery, prudential
rules should be reviewed to facilitate long-term equity investments, while at the same
time ensuring that such changes do not harm policyholder protection and financial
stability. For further evidence, please refer to Sub-section 6.1.4 of the Evaluation Annex.
Insurers could contribute more to the greening of the economy
In relation to the European Green Deal, the Commission’s Communication states that
climate and environmental risks should be managed and integrated into the financial
system. As regards insurers, the objective concerns both how insurers invest their money
and how they take into account sustainability risks in their risk management concerning
investments and underwriting of insurance risks. With respect to the former, insurers can
play a role in closing the investment gap for environmental-friendly assets and activities.
However, EIOPA estimates that only up to 5 % of the total asset value held by insurers
may be eligible investments in sustainable assets (as identified by the taxonomy4
), and
therefore contribute to the climate objectives of the European Green Deal. This seems too
low to achieve the Union’s objective of a climate-neutral continent.
A first issue is probably the lack of available investable assets that are aligned with the
taxonomy5
. While the review of Solvency II will not address the need to foster the supply
of sustainable assets, there is currently no explicit prudential incentive for insurers to
invest in such assets. Indeed, the rules on capital requirements do not distinguish between
3
Long-term equities are a regulatory asset class introduced by the European Commission in 2019. Equity
investments that meet certain strict criteria can be subject to capital requirements that are between 44% and
56% lower than those applicable to “standard” equity investments.
4
Throughout this document, “taxonomy” refers to the technical screening criteria for the identification of
sustainable economic activities as adopted under Regulation (EU) 2020/852.
5
As an illustration, the European Sustainable Finance Survey 2020 highlighted that only 2% of total
revenue from CAC 40 and EURO STOXX 50 companies, and 1% from DAX 30 companies, are estimated
to be fully taxonomy-aligned. This implies that the value of “green equities” stemming from the largest
listed companies equals around € 40 billion in France and € 10 billion in Germany, to be compared with a
total of insurers’ investments of respectively € 2,700 billion in France and € 2,100 billion in Germany.
Page | 8
sustainable and other investments, and do not capture the possibly lower (respectively
higher) level of risks over the long term of some categories of “green” (respectively
“brown”) assets, all else equal. Also, the positive (respectively negative) externalities of
investing in such assets are not captured.
Furthermore, insurers are exposed to climate and environmental risks through their assets
and liabilities towards policyholders. While Solvency II contains a general requirement
on insurers to take into account all risks in their risk management, the Directive does also
name particular risk categories explicitly. However, climate and environmental risks are
not part of those risk categories and it would often materialise through other risk
categories, e.g. market or underwriting risk. This may result in a lack of clarity as regards
whether and where insurers are expected to reflect climate and environmental risks and,
as a consequence, in insufficient management of those risks by insurers. For instance,
only a small proportion of all insurance companies reflects climate change risks in their
own risk and solvency assessment (ORSA). In 2020, EIOPA analysed a sample of ORSA
reports from 1682 companies representing more than 80% of the EU insurance market.
Only 13% of the analysed ORSA reports made a reference to climate change risk
scenarios6
.
In conclusion, the prudential framework requires the same capital to be held for
sustainable investment as for investment that do not qualify as sustainable. However, the
financial risks of some categories of sustainable investments may already be lower or,
notably with respect to transition risks, could be lower over a longer term. To achieve the
political objective of private investments in the green transition, prudential rules should
be reviewed to ensure that capital requirements on green assets are not higher than
necessary to avoid harm to policyholder protection and financial stability. Furthermore,
there is no clear obligation to manage and reflect climate and environmental risks.
However, given their clear importance going forward, from both an economic and risk
perspective, there may be room for appropriate regulatory adjustments in this area.
2.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies
The economic and financial conditions faced by insurers over the recent years and
months (in particular in relation to interest rate risks and market volatility) significantly
differ from those present when the Solvency II framework was adopted7
. Therefore, the
Directive may contain outdated parameters and provisions, possibly resulting in an
insufficient risk sensitivity and excessive volatility in some areas of the framework. The
below subsections provide a few examples of such shortcomings.
Insufficient reflection of the low interest-rate environment in the Solvency II framework
As insurers are large investors in fixed-income securities (i.e. debt instruments that pay a
regular fixed amount of coupon interest), it is commonly accepted that the current low –
and sometimes even negative – interest rate environment is one of the main risks that EU
insurers have been facing over the recent years. This is because they earn only low
returns (or even make losses) which impact their profitability and solvency. This limits
them in their ability to provide adequate insurance products for their customers. As
shown in Sub-section 6.3.2 of the Evaluation Annex, between 2018 and 2020, the level
of interest rates (for the euro) has significantly decreased, with a material adverse impact
of both insurers’ solvency position and profitability.
6
EIOPA: Consultation Paper on the draft Opinion on the use of climate change risk scenarios in ORSA
(EIOPA-BoS-20/561), October 2020, see Annex 1.
7
The Solvency II Delegated Regulation was adopted on 10 October 2014.
Page | 9
In this regard, the underlying assumptions based on which the Solvency II capital
requirements under the standard formula are designed are outdated, as they do not
envisage the possibility for interest rates to move in negative territory, or when rates are
already negative, to further decrease. Therefore, the prudential framework, which leads to
an underestimation of the interest rate risk to which insurers are exposed, has not
provided clear obligations to insurers for having capital to buffer for the risk of negative
interest rates over a recent years, which has now materialised. If not addressed, this
underestimation of the real risks to which insurers are exposed could become detrimental
to policyholder protection, as insurers may not at some point have sufficient capital to
absorb losses if the downward trend in interest rates continues in the future. Already in
2018, EIOPA estimated that this underestimation of interest rate risk represented on
average 14 percentage points of solvency ratios at European level8
.
Sub-section 6.1.1 of the Evaluation Annex also shows that the current low interest rate
environment raises doubts about the appropriateness of the stipulated regulatory interest
rate curves that have to be used by insurance companies when valuing their long-term
liabilities towards policyholders. As an illustration, the yield at issuance on a 100-year
Austrian government bond (AA-rated) was lower than the 33-year regulatory risk-free
interest rate in June 2020. An underestimation of the value of insurers’ liabilities would
lead to an overestimation of their solvency position, and may limit prudential incentives
for insurers to establish robust asset-liability management strategies, with detrimental
side effects on policyholder protection.
Insufficient ability of the framework to mitigate the impact of financial market turmoil on
the solvency position of insurers.
In addition to being risk based, Solvency II relies on the pivotal principle of market-
consistent valuation of assets and liabilities, which means that insurers have to rely as
much as possible on market data when establishing their balance sheet. By nature, such
characteristics imply high short-term volatility in insurers’ assets (the value of which
evolves with financial market movements) and liabilities (for instance, when asset values
and asset returns collapse, the cost for an insurer of providing a high guaranteed rate on a
life insurance product increases significantly). Those fluctuations in asset and liability
values lead to a high volatility in the level of insurers’ capital resources and more
generally in their solvency position.
Solvency II also includes several regulatory mechanisms (so-called "long-term guarantee
measures and the measures on equity risk"9
) which are aimed at mitigating the impact of
short-term market turmoil on insurers solvency position.
However, as evidenced in Sub-section 6.1.1 of the Evaluation Annex, those measures
have proved to be insufficiently effective at mitigating excessive short-term volatility in
the solvency position of insurers, in particular during market turmoil such as during
March 2020 in the context of the Covid-19 outbreak. When the short-term volatility in
insurers’ solvency ratios becomes excessively high, it fosters short-termism in insurers’
underwriting and investment activities. In particular, it may unduly incentivise life
insurers to reduce their supply of long-term insurance products with guaranteed
minimum returns, to shift a large part of the risk to policyholders (via the distribution of
unit- or index-linked products), and to divest from real assets supporting the long-term
8
See EIOPA’s webpage. Note that the Commission at that time decided not to endorse EIOPA’s advice but
to discuss it as part of the broader review of Solvency II Directive where all topics in relation to interest
rates could be discussed at the same time.
9
For further explanations, see Section 2 and Sub-section 6.1.1 of the Evaluation Annex.
Page | 10
financing of the European economy. Also, if the treatment of long-term insurance
products is unduly penalising for EU insurers, they may be put at a disadvantage
compared to their non-EU competitors and will have less stable surplus capital (capital
minus capital requirements) to expand internationally. Therefore, excessive volatility is
also impeding international competitiveness of the European industry10
.
The Evaluation Annex also shows that the current parameters of the “long-term
guarantee measures” sometimes give rise to unexpected improvements in the solvency
position of some insurers, during crises such as the Covid-19 outbreak. Such unintended
situations (called “over-shooting effect”) raise supervisory challenges, because the
existing regulatory framework may not result in appropriate risk measurement under
stressed situations.
2.3. Insufficient proportionality of the current prudential rules generating
unnecessary and unjustified administrative compliance costs for small and
less complex insurers
Outdated thresholds of exclusion from the Solvency II framework
The Solvency II Directive already provides that very small insurers are excluded from the
application of the Directive if they meet a series of cumulative criteria, including limited
revenues (lower than EUR 5 million) and risk volume (insurers’ liabilities towards
policyholders of less than EUR 25 million).
As outlined in Sub-section 6.2.2 of the Evaluation Annex, the thresholds for exclusion
have not been amended since the adoption of the Solvency II Directive in 2009.
Therefore, those thresholds may be considered as outdated, although they will have to be
updated to reflect inflation every five years, provided that the inflation since the last
update is greater than 5%. The first update will therefore take place in 202111
. Still, the
lack of reassessment of the appropriateness of thresholds may imply high compliance
costs for small companies in the scope of Solvency II, which may not compensate the
benefit of being subject to Solvency II.
Insufficient application of proportionate rules in Solvency II
The Solvency II framework broadly embeds the principle of proportionality, insofar as it
requires ensuring that not only the requirements imposed to insurance companies, but
also the intensity of the supervisory review process, are commensurate to the “nature,
scale and complexity” of each company which is subject to Solvency II. Therefore, the
application of the proportionality principle does not depend on the size of the companies
but on the risks that they are facing. The framework as a whole is formulated in a
modular manner, such that insurance and reinsurance companies must only apply those
requirements, which are relevant to the risks they incur.
As Solvency II does not clearly define which firms can be subject to proportionality and
which measures can be implemented in a proportionate way, the current framework
results in legal uncertainty and lack of predictability for both insurers and NSAs. There is
no report on the effective application of proportionality under Solvency II. However,
Sub-section 6.2.2 of the Evaluation Annex concludes that the current framework results
10
At this stage, not all countries have a risk-based and market value based framework. Therefore, in those
countries, insurers’ capital requirements may be less sensitive to market risks and the value of their
liabilities may be less sensitive to changes in credit spreads. This lowers the volatility of those insurers’
solvency ratio, although it makes them more exposed to the materialisation of market risks as the
prudential framework would not appropriately reflect it.
11
Five years after the entry into application of Solvency II.
Page | 11
in a limited implementation in practice of the proportionality principle. If not
implemented in a proportionate way, Solvency II requirements become very challenging
to comply with for smaller and less complex insurers, as their limited riskiness is not
appropriately accounted for in supervisory review processes. This implies that the
intensity of regulatory requirements is not sufficiently modulated so that they do not
generate a disproportionate burden for small and non-complex insurers.
The issue of proportionality concerns all three pillars of Solvency II. However, the lack
of proportionality in the implementation of prudential issues is particularly acute in
relation to reporting and disclosure requirements by insurance companies (“pillar 3”). In
this regard, Sub-section 6.2.1 of the Evaluation Annex shows that the information that
must be publicly disclosed to policyholders proves to be too complex and too detailed,
lacking a high-level simple overview. As regards data collection and reporting to NSAs,
the Evaluation Annex underlines that the number and frequency of submission of the
quantitative templates for regular reporting (often on quarterly basis) generates costs to
both insurers and supervisors.
2.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’ failures
Inconsistent and insufficiently coordinated supervision of insurance companies and
groups, including in relation to cross-border activities
Solvency II has facilitated the integration of the Single Market for insurance services by
improving the level-playing field and supervisory convergence.
However, as shown in Sub-section 6.1.3 of the Evaluation Annex, recent failures of
insurance companies, which operated mainly outside the country where they initially
obtained their license, highlighted shortcomings and deficiencies in the quality and
coordination of insurance supervision including in relation to cross-border activities. It
also shows the insufficient prioritisation of some NSAs on the supervision of cross-
border business12
. EIOPA’s coordination role, although reinforced in the context of the
review of the Regulation (EU) 2019/2175 establishing the European Supervisory
Authorities, proves to be insufficient in ensuring a high-quality convergent supervision
across Member States. In addition, the lack of data sharing between NSAs may hinder
the effective supervision of insurers operating on a cross-border basis.
Furthermore, the Evaluation Annex shows in the same Sub-section that due to legal
uncertainties, several areas of the framework may not be sufficient for a harmonised
implementation of the rules by insurers and NSAs, including in relation to the
supervision of insurance groups. In particular, challenges arise from the supervision of
groups that are headquartered or active in non-EEA countries, and of mixed financial
groups combining banking and insurance activities (financial conglomerates).
Insufficient supervisory toolkit to intervene when firms are in financial distress
12
This conclusion was also drawn by the European Court of Auditors (ECA) in its Special Report on
EIOPA’s actions to ensure convergence between national insurance supervisory systems in the EU between
2015 and 2017. The ECA identified “systemic weaknesses in the current supervisory system for cross-
border business” that required legislative changes to ensure an equal level of supervision for companies
running their business in another Member State, regardless of the chosen business model. Deficiencies in
cross-border supervision were also identified by the International Monetary Funds, for instance in its
Country Report No. 20/252 where one of the recommendations is to strengthen the national framework for
the supervision of cross-border business and to allocate sufficient resources to it.
Page | 12
Although the Solvency II framework aims to minimise the likelihood of insurance
failures, such likelihood is not brought to zero either. Recent failures, in particular of
cross-border insurers, demonstrated that this risk remains not sufficiently addressed
early, partly due to deficiencies in prudential supervision by some public authorities.
However, experience has also shown that, despite the existing Solvency II arrangements,
the efforts to recover an insurer in financial distress are sometimes inefficient or run into
legal or operational difficulties for a lack of proper and timely preparation of recovery
options. Likewise, public authorities may fall short of options that could effectively avoid
the winding-up of the insurer as they have not looked at failure scenarios and have not
anticipated possible impediments to deploying alternative measures.
Furthermore, public authorities do not always have sufficient tools to avert the failure of
insurers. As reported by EIOPA13
, one third of NSAs identified gaps and shortcomings in
their range of recovery and resolution powers. Likewise, public authorities often lack
alternatives to insolvency for failing insurers. Even traditional tools for an orderly wind-
up such as run-off (i.e. a ban on writing new business while fulfilling existing
obligations) and transfer of portfolios are either unavailable or subject to restrictions in
some Member States. Other important powers to stabilise a failing insurer, such as stays
on early termination rights, are only available in a small minority of Member States.
Even in the few Member States equipped with the necessary tools, resolution approaches
remain tailored to national objectives and constraints and could therefore differ widely
(i.e. legal frameworks, scope of powers and tools, conditions for exercising these
powers).
Finally, despite general cross-border coordination mechanisms for supervision, there is
no clear framework for coordination and cooperation between authorities to prepare and
manage a (near) failure of an insurance company operating across borders. As illustrated
by EIOPA14
, this can result in conflicts of interest and a misalignment between the
national accountability and mandate of supervisors (protecting the interest of
policyholders at national level) and the cross-border nature of the insurance industry that
is not coherent with the objectives of the Single Market. Cross-border cooperation and
coordination is however essential to support recovery, eliminate impediments to an
orderly resolution process and reduce suboptimal outcomes at the EU level. For further
details, see Sub-section 6.1.3 of the Evaluation Annex.
Inadequate / insufficient protection of policyholders in case of failure
Currently, 17 Member States (and Norway) operate one or more IGS(s). This means that
a significant share of gross written premiums are not covered by any IGS and that losses
stemming from the failure of insurance companies can still be passed onto EU
policyholders or taxpayers.
The current patchwork of national guarantee schemes means that policyholders across the
EU are not equally protected. Gaps, but also overlaps15
, in the protection of policyholders
can stem from substantial differences in the design features of existing national IGSs,
notably in terms of geographical coverage. Therefore, for the same type of insurance
policy, policyholders might benefit from a different level of IGS protection or no
13
See EIOPA’s Opinion on the harmonisation of recovery and resolution frameworks (2017).
14
See for instance Boxes 13.2 and 13.4 of EIOPA’s background analysis
15
In some cases, insurers operating cross-border contribute to two national IGSs to cover the same policy.
Page | 13
protection at all, depending on where they live and on where they have contracted the
policy.16
For further details, see Annex 5 and Sub-section 6.1.3 of the Evaluation Annex.
Insurers in the EU may therefore face different costs and incentive structures, which can
lead to an uneven level-playing field and add to the regulatory arbitrage previously
described.17
2.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector
While policyholder protection is the primary objective of Solvency II, regulators and
supervisors also have to preserve financial stability. To this end, supervising insurers and
reinsurers on an individual basis without taking into account their interconnections with
other market participants and common risky (herding) behaviours may not be sufficient
to preserve financial stability.
Most rules of the Solvency II Directive are targeted to individual insurers (so-called
“micro-prudential supervision”). Those provisions, for instance risk-based capital
requirements, can help preventing systemic risk as they provide disincentives for
excessive risk-taking. There are also several regulatory tools embedded in Solvency II
that more directly contribute to preventing systemic risk, for instance by avoiding forced-
sales of assets during market turmoil, which could amplify negative market movements.
However, according to EIOPA and ESRB, there are several shortcomings in the existing
framework, which may limit public authorities’ ability to preserve financial stability, and
to address risks generated by the insurance sector itself. In particular, as further detailed
in the Sub-section 6.3.2 of the Evaluation Annex, the current set of rules may not
appropriately address issues of search-for-yield behaviours, high concentration of
investment portfolios in certain assets and sectors, potential liquidity strains and
insufficient coordination of macro-prudential measures, as illustrated during the Covid-
19 crisis.
2.6. How will the problems evolve if not addressed?
For the purpose of this impact assessment, the baseline scenario will be to “do nothing”
(this “baseline scenario” will be “Option 1” for each problem).
2.6.1. Limited incentives for insurers to contribute to the long-term financing
and the greening of the European economy
Doing nothing would generate opportunity costs for the wider economy in the form of
lost output and overall welfare, by possibly preventing insurers from providing capital
injections to businesses, notably SMEs, and from financing the transition to a carbon-
neutral economy. This would not be coherent with the objectives of the CMU and the
European Green Deal. It could also affect international competitiveness. Still, it can be
argued that the higher risk of investing in equity justifies higher capital requirements, and
that such an approach actually makes insurers’ solvency more resilient to financial
16
In some Member States, the guarantee schemes may cover all EEA policies issued by a domestic insurer
or by a foreign branch of a domestic insurer. In other Member States, the schemes may only cover
domestic policies issued by a domestic insurer or a domestic branch of a foreign insurer. As a result,
policyholders of insurance branches may end up being covered by no national scheme.
17
In particular, some Home supervisors may have less incentive to supervise insurers with business models
concentrated on free provision of services in other Member States when these are not covered by national
guarantee schemes that have to be financed by the domestic insurance industry. This situation can further
undermine the integrity of the Single Market.
Page | 14
shocks in the long- run. Similarly, insurers that have already invested in sustainable
assets may have less “free capital” which may affect competitiveness and the ability to
offer products with guarantees to consumers. For further evidence on those different
issues, please refer to Sub-sections 6.1.4 and 6.3.3 of the Evaluation Annex.
2.6.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies
Not addressing the issue of insufficient risk sensitivity of the framework would have
detrimental effect on the overall level of policyholder protection, and could foster risk-
taking activities by insurers, with potential negative side effects on financial stability
risks.
While volatility had been very low in recent years, it has sharply moved upwards as the
Covid-19 crisis became virulent, and higher volatility seems to remain entrenched in the
financial system. In consequence, without policy action, insurers might tend to reduce
their investment time horizon and aim to shift market risks to policyholders (via the
supply of unit-linked products) in a higher volatility environment. Finally, excessive
volatility can generate procyclical behaviours, and therefore raise financial stability risks.
Doing nothing would not be coherent with the renewed Action Plan on the CMU where it
is acknowledged that volatility mitigation is key to help insurers provide long-term
(capital) financing to the EU economy.
For further evidence on those different issues, please refer to Sub-sections 6.1.1 and 6.3.2
of the Evaluation Annex.
2.6.3. Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs for small and less complex
insurers
The high compliance cost of Solvency II18
(3.18% of total operating costs, the highest
one-off costs among the financial services frameworks19
), could be a barrier to the entry
and growth of new competitors in the Single Market, with undesirable effects in the offer
of insurance products and/or in their price for policyholders20
(higher fees). Therefore,
doing nothing on proportionality may progressively lead to a less diversified landscape of
insurers in terms of size and more concentration. The reduced competition in the sector
could be detrimental to consumers.
In addition, as the conditions to apply the principle of proportionality are not clearly
defined, insurers with a similar risk profile, could be subject to different rules depending
on the Member State in which they are located, which is detrimental to the level-playing
field in the EU.
18
Note that as national prudential frameworks largely differ between Member States, it is not possible to
have an overview of the difference between the compliance costs of Solvency II and those of national
frameworks. However, an insurer can always request licensing (and therefore applying) Solvency II, if it
considers that the national framework is more burdensome or more costly that Solvency II.
19
See page 48 of the Study on the costs of compliance for the financial sector.
20
For further evidence, please refer to Section 6.2 of the Evaluation Annex.
Page | 15
2.6.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’
failures
Doing nothing would leave unaddressed the inconsistencies and gaps identified in the
Solvency II framework on the quality of supervision. Only relying on EIOPA’s soft (non-
binding) tools to ensure convergence in supervision is of limited effectiveness as
supervisory authorities have no legal obligation to comply with those principles.
Similarly, the problem drivers identified in Sub-section 6.1.3 of the Evaluation Annex
and in the problem definition on policyholder protection in case of insurers’ (near-
)failures would remain, with the risk of late and not sufficiently prepared measures by
insurers and/or public authorities in case of an insurer’s distress. This could have a
negative impact on policyholder protection and level-playing field as further Member
States would probably establish national recovery and resolution frameworks to
implement international guidance. Finally, doing nothing on IGSs would mean that
Member States continue to take different approaches to IGS, including a total absence of
IGS in some Member States. Uneven and insufficient levels of protection could
undermine consumers’ trust in the Single Market for insurance services.
For further details, see Annex 5 and Sub-section 6.1.3 of the Evaluation Annex.
2.6.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector
The baseline scenario would not impose new requirements on insurers and reinsurers,
and therefore would allow avoiding additional compliance costs for them. In addition, the
absence on new rules on investments or quantitative requirements (capital surcharge for
systemic risk, concentration limits, etc.) would ensure that EU insurers’ short-term
competitiveness21
is not affected.
However, doing nothing would not guarantee that supervisors have the powers to address
systemic risk, which is not coherent with one of the main objectives of Solvency II
(preserving financial stability). Furthermore, a lack of sufficient supervisory tools to
prevent financial instability risks originating from the insurance sector would be negative
for policyholders in the long term, since insurance failures may require public
intervention and indirect costs for taxpayers. Furthermore, the economic and financial
consequences of a crisis on social welfare go far beyond the sole insurance sector, and
may concern the wider economy. It should be noted that the “holistic framework” for
systemic risk, adopted by the Insurance Association of Insurance Supervisors and the
Financial Stability board in November 2019, provides that supervisory authorities should
have the power and mandate to identify, monitor and address, where necessary, the build-
up and transmission of systemic risk in the insurance sector.22
3. WHY SHOULD THE EU ACT?
3.1. Legal basis
The Solvency II Directive provides for a comprehensive regulatory framework regarding
the taking up and the pursuit of insurance and reinsurance (hereafter “insurance”)
business within the Union. The principle of regulating the taking-up and pursuit of the
21
In case of the existence of systemic risks, leaving them unaddressed could have a very negative impact
on insurers if those risks materialise in the long run.
22
See the IAIS Insurance Core Principle 24.
Page | 16
business of insurance is long established at European level, and leaving this matter to the
discretion of Member States would highly hinder the right of establishment and the
freedom to provide services which European insurance companies benefit from to date.
The legal bases of the current Directive are Articles 53(1) and 62 of the Treaty on the
Functioning of the European Union. This would also be the legal basis for the envisaged
introduction of a new minimum harmonised framework for insurance guarantee schemes.
In order to continue to harmonise the rules at stake, or introduce these new harmonised
rules, EU action in accordance with these Articles is needed.
On the envisaged harmonised framework for recovery and resolution of (re)insurers,
which aims at ensuring a minimum level of harmonisation across the EU, the legal basis
is Article 114 of the Treaty on the Functioning of the European Union.
3.2. Necessity and Added Value of EU action
The review aims to amend certain provisions of the Solvency II Directive, in particular
those on capital requirements, on valuation of insurance liabilities towards policyholders,
on cross-border supervision and on preventive recovery planning. It also aims at
providing necessary clarifications and changes to the principle of proportionality. With
regard to these particular issues, only EU action to clarify these provisions will ensure
that going forward, these regulatory provisions are applied uniformly and guarantee the
existence of the well-established regulatory framework regarding the taking up and the
pursuit of insurance and business, which are essential for the Single Market.
In addition to amendments of existing rules, the review will consider the introduction of
new dimensions in Solvency II, notably in relation to climate change and environmental
risks, to the harmonisation of national frameworks for resolution, and to macro-
prudential tools. In addition, the impact assessment will contemplate putting forward a
stand-alone proposal for a minimum harmonisation framework for insurance guarantee
schemes. The necessity and added value of EU action on those areas is justified in the
next paragraphs.
Climate change and environmental risks: The limited incentives for insurers to contribute
to the greening of the economy could possibly be addressed through individual actions
by Member States. In fact, given the commitments to environmental and climate policy
goals, both at international (e.g. Paris Agreement) and at Union level, it is very likely that
more Member States and NSAs will explore options of ensuring a contribution by the
insurance sector. The lack of clarity on the relevance of sustainability risks in current
prudential rules could however be exacerbated by parallel and uncoordinated attempts by
Member States in that field which would undermine the Single Market for insurance
services. Thus, such clarification needs to be provided at Union level so that insurance
companies operating in several Member States comply with rules within a single
framework and for supervisory authorities to coordinate and align actions within that
framework (instead of segmenting the market via different actions and rules).
Resolution: A minimum harmonised resolution framework for insurers, aiming to
address situations where an insurer is no longer viable or likely to be no longer viable23
,
would ensure a common approach to address and mitigate the consequences of an
insurer’s failure across the EU, thereby fostering cross-border cooperation and
coordination. If applied in a proportionate manner, this could improve the functioning of
the Single Market, ensure that the overall framework is suitable to maintain a high level
23
This would encompass the establishment of a national resolution authority, the introduction of a common
set of resolution objectives, powers and tools.
Page | 17
of protection for policyholders and beneficiaries and contribute to preserving financial
stability in the EU.
Insurance guarantee schemes: Currently, in the event an insurer fails, a patchwork of
national schemes is in place across the Member States, which can step in. These
guarantee schemes offer different levels of protection, cover a different scope of
insurance products and have different geographical scopes. Solvency II does not contain
substantive provisions on IGS. It only contains a provision providing that host Member
States may require non-life insurers from other Member States selling insurance products
on their territories through branches or cross-border sales to join and participate in their
IGS. Combined with the increasing share of cross-border activities within the EU Single
Market and the absence of adequate cross-border mechanisms for compensation, the
current situation results in an inefficient and incomplete protection for policyholders and
other beneficiaries. Establishing mechanisms that would address these issues would not
be possible without EU action. Only an EU action can ensure consistently that all
policyholders and beneficiaries acquiring insurance policies in the EU benefit from a
minimum level of protection in the event that their insurer fails, and in particular in
cross-border situations. EU action would also be necessary to create an appropriate and
consistent incentive structure across the EU that is conducive of market discipline by
involving the insurance industry in the financial consequences of an insurance failure24
.
Macro-prudential supervision: Solvency II is at this stage mainly focused on micro-
prudential supervision (i.e. the supervision of individual insurers) with the aim of
protecting policyholders, but the Directive also mandates supervisors to preserve
financial stability. Under certain (and so far limited) circumstances, insurance activities
can indeed originate or amplify systemic risk. An action at EU level to integrate
(targeted) macro-prudential elements within the Solvency II Directive would ensure
uniform application of the new provisions. As financial stability does not have national
borders (in particular since insurance companies and groups largely operate on a cross-
border basis), an EU action (aiming to ensure that public authorities are granted sufficient
powers allowing them to adopt appropriate and coordinated supervisory responses to
systemic risks in all Member States) would contribute to the financial stability in the
whole Union. This would also be consistent with the approach followed by banking
regulation where macro-prudential supervision is framed at EU level. Finally, the scope
of the amendments would have to be sufficiently targeted in order to ensure consistency
with the existing instruments that have been designed as micro-prudential but may also
have a macro-prudential relevance (e.g. the ORSA, which is the process by insurers to
assess their exposures to all quantitative and qualitative risks, or the prudent person
principle which requires insurers to monitor risks related to their investment activities,).
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?
4.1. General objectives
The review of Solvency II will aim to achieve the following general objectives:
 Increase insurers’ contribution to the long-term and sustainable financing of the
economy;
 Enhance the protection of policyholders;
 Contribute to financial stability;
24
See notably measures to reduce moral hazard risk and align incentives in the Organisation of Economic
Cooperation and Development’s paper: “Policyholder Protection Schemes: Selected Considerations”
(2013)
Page | 18
 Preserve the international competitiveness of the European insurance industry and
improving the efficiency of the EU insurance industry.
4.2. Specific objectives
The impact assessment will consider the following five specific objectives:
 Provide incentives for insurers to long-term sustainable financing of the economy
(hereafter “LT green financing”)
 Improve risk-sensitivity (hereafter “risk sensitivity”)
 Mitigate excessive short-term volatility in insurers’ solvency position (hereafter
“volatility”);
 Increase proportionality of prudential rules aiming to remove unnecessary and
unjustified administrative burden and compliance costs (hereafter
“proportionality”)25 ;
 Enhance quality, consistency and coordination of insurance supervision across the
EU, and improve the protection of policyholders and beneficiaries, including
when their insurer fails (hereafter “supervision / protection against failure”);
 Better address the potential build-up of systemic risk in the insurance sector
(hereafter “financial stability”).
Figure 2: links between general and specific objectives
25
NB: we will also include the dimension of simplification as part of this specific objective as a simpler
framework also contributes to reducing compliance costs and administrative burden.
Page | 19
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?
5.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy
The “preferred policy option” may be a combination of one option in relation to the long-
term financing of the European economy (among Options 2 or 3) and another one in
relation to the greening of the European economy (among Options 4 and 5).
Option label Option description
Option 1: Do nothing This is the baseline scenario.
Option 2: Facilitate
long-term investments
in equity
Loosen eligibility criteria for the preferential treatment on
long-term equity investments26
, with the aim of extending the
scope of equities that may be subject to that preferential
treatment. This is in line with EIOPA’s general approach27
.
Option 3: Reduce
capital requirements
on all equity
investments
Proceed to a general decrease in capital requirements on all
equity investments, without any restriction (no reference to
any long-term perspective or long-term nature of the
investment).
Option 4: Strengthen
“Pillar 2”
requirements in
relation to climate
change and
sustainability risks
Strengthen the qualitative risk-management requirements to
ensure that insurers appropriately monitor, manage and
mitigate climate change and sustainability risks, as
recommended by EIOPA
Option 5: Strengthen
“Pillar 2”
requirements and
incorporate climate
change and
sustainability risks in
quantitative rules
In addition to Option 4, quantitative rules would be amended
so that they depend on the “green” nature of insurers’
investments, i.e. all else equal, insurers investing more in
“green” assets would have a better solvency position (i.e.
higher capital resources over capital requirements) than
others.
Options discarded at an early stage
A complement to Option 5 could have been an option where additional disclosure
requirements in relation to climate change and environmental risks are introduced in
Solvency II, so that external stakeholders are fully informed about the sustainability of
insurers’ activities. However, the communication on the European Green Deal underlined
that the Commission intends to review the Non-Financial Reporting Directive (NFRD)
the scope of which goes beyond the insurance sector, in order to extend “green”
disclosure requirements to all types of financial market participants through one single
piece of legislation. Therefore, in order to avoid overlapping disclosure requirements for
insurers in different Directives, the option of introducing specific green disclosure
requirements for insurers is not assessed in the context of this initiative. However, should
gaps in the disclosure requirement for the insurance sector remain after the review of
NFRD, amendments to Solvency II rules on disclosures could be considered.
26
Long term equity investments are a regulatory asset class which were introduced in Solvency II in 2019.
Investments in equity fall under this category if they meet certain criteria defined by the framework. The
adjustments to the criteria include a simplification of the approach to demonstrate the ability of insurers to
stick to their investments under stress, a simpler requirement in relation to how the assets and liabilities
should be managed (removal of the so-called “ring-fencing requirement”).
27
Please refer to section 2.8 of EIOPA’s opinion.
Page | 20
In relation to amendments of quantitative requirements, an alternative or a complement to
Option 5 could have been to amend quantitative rules so that all else equal, insurers
investing in environmentally harmful (“brown”) assets would have a lower solvency
position than other insurers (i.e. prudential rules would penalise “brown investments”).
However, contrary to green assets, there is no commonly accepted European definition of
“brown” investments. Without such a definition, it would be very challenging (if not
impossible) to define penalising factors for brown investments and to assess the
quantitative impact of such an option. Therefore, such an option has been discarded at
this stage, but could be reconsidered if a taxonomy for “brown assets” were to be
developed. In addition, a standalone approach for the insurance sector which would not
be consistent with other financial market participants is not deemed appropriate.
5.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies
Option label Option description
Option 1: Do nothing. This is the baseline scenario.
Option 2: Fix all
technical flaws in
relation to risk
sensitivity and volatility
Under this option, changes that are technically justified and
aiming to address risk-sensitivity and/or volatility would be
adopted, broadly in line with EIOPA’s advice:
- To improve risk-sensitivity, incorporate negative interest
rates in standard formula capital requirements and better
take into account market rates used to value long-term
insurance liabilities;
- To reduce undue volatility, amend the long-term
guarantee measures in order to improve the volatility-
mitigating effect of the framework.
Option 3: Address
issues of risk sensitivity
and volatility while
balancing the
cumulative effect of the
changes
Under this option, the changes presented in Option 2 would
be implemented, subject to a phasing-in period aiming to
smoothen the impact of the amendments over time. In
addition, some additional measures would be taken in order
to mitigate (part of) the long-term increase in capital
requirements resulting from those changes28
.
No option was discarded at an early stage.
5.3. Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs for small and less complex
insurers
In order to avoid excessive compliance costs, two elements can be combined: first, a
further extension of the thresholds of the Directive (see Article 4) which would directly
exclude from its mandatory scope a higher number of small insurers; second, new
measures to reduce and simplify prudential rules for those insurers that would continue
being in the scope of Solvency II. While the first element would address the problem of
28
In other words, while Option 2 is designed to maximise the objective of sound prudential framework (by
making it more risk sensitive and improving its technical volatility-mitigating tools), Option 3 takes into
account also the cumulative impact on capital requirements and tries to draw a trade-off between the
objective of risk sensitivity and the one of not overburdening insurers so that they can continue to help the
economy and the green transition and to remain competitive at international level
Page | 21
lack of proportionality for the smallest firms, only the second element would improve the
application of the proportionality principle for the rest of firms, by not relying only on
size. Therefore, only a combination of elements would allow an optimal solution.
Option label Option description
Option 1: Do
nothing
This is the baseline scenario.
Option 2:
Exclude a
significant
number of firms
from Solvency
II and enhance
the
proportionality
principle within
Solvency II
Proportionality would be implemented as follows, in line with
EIOPA’s general approach:
- Increase significantly the thresholds of exclusion from Solvency
II. The thresholds on risk volume would be doubled (from EUR
25 million to EUR 50 million) in order to ensure that only the
less risky insurers are left out of the scope of Solvency II, and the
thresholds on revenues would be extended from EUR 5 million
to EUR 25 million.
- Consequently, a large number of firms would no longer have to
apply Solvency II, but would be subject to national specific
regimes.
- A certain number of additional firms subject to Solvency II
would be identified, based on criteria, as being of “low-risk
profile” and would benefit from automatic application of all
Solvency II proportionality measures which would be clearly
specified in the legislation.
Option 3: Give
priority to
enhancing the
proportionality
principle within
Solvency II and
make a smaller
change to the
exclusion
thresholds.
Proportionality would be implemented in the following way:
- Less firms would be excluded from the application of Solvency
II than under Option 2 (the thresholds on revenues would be
multiplied by 3 instead by 5, as in Option 2)29
. Solvency II would
still apply to more firms than in Option 2, but a larger number of
those firms would be classified as low-risk profile and would
benefit from automatic application of Solvency II proportionality
measures, which would be clearly specified in the legislation and
extended compared to Option 2.
- A larger number of insurers would remain in the scope of the
European framework, but compliance costs would be
significantly reduced for those that meet the conditions to benefit
from proportionality measures.
Options discarded at an early stage
Alternative options could have been different exclusion thresholds that are lower than the
changes proposed in Options 2 and 3. However, in view of the limited impact of such
lower changes, those options, which were also tested by EIOPA, were discarded.
Similarly, one could have envisaged a further increase in thresholds than the one
proposed by EIOPA (as reflected in Option 2). However, in view of the downsides of
Option 2 which are specified in the next section, this alternative option, which was also
discarded by EIOPA, has not been considered in this impact assessment.
29
More precisely, the threshold on revenues would be multiplied by three instead of by five (i.e. from EUR
5 million to EUR 15 million – instead of EUR 25 million like in Option 2).
Page | 22
5.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’ failures
For the purpose of analysing this problem, different policy options will be considered in
order to address the issues of:
i. Inconsistent and insufficiently coordinated supervision of insurance companies
and groups, including in relation to cross-border activities
ii. Insufficient supervisory and resolution toolkit to address insurers’ distress
iii. Inadequate protection of policyholders in case of failure.
Option label Option description
Option 1: Do nothing This is the baseline scenario.
Option 2: Improve the
quality of supervision by
strengthening or clarifying
rules on certain aspects, in
particular in relation to
cross-border supervision
Under this option, the framework would be clarified and
strengthened so as to ensure more quality and
convergence of supervision of insurance firms and
groups. More requirements for cooperation between
Home and Host30
supervisory authorities would be
introduced, and EIOPA’s coordination role would be
strengthened. This is in line with EIOPA’s general
approach.
Option 3: Introduce
minimum harmonising
rules to ensure that
insurance failures can be
better averted or managed
in an orderly manner.
Under this approach, minimum harmonising rules would
be introduced, with the aim of providing public
authorities with a toolkit to prevent and manage insurance
failures, in particular by requiring ex ante31
planning of
remedial actions in case of insurers’ (near-)failures, and
by strengthening cooperation rules between authorities.
This is in line with EIOPA’s advice.
Option 4: Introduce
minimum harmonising
rules to protect
policyholders in the event
of an insurer’s failure
Under this approach, minimum harmonising rules would
be introduced so that each Member State has to establish
safety nets to protect policyholders when their insurer
fails (“IGSs”). This is in line with EIOPA’s general
approach.
Note that due to size constraints, the policy options do not explicitly refer to topics of
internal models, and reporting and disclosure, although those aspects fall under the issue
of quality of supervision. The dedicated impact assessment of each of those topics is
presented in Annex 7. In addition, Annex 5 provides a further technical analysis of the
different features of the design of harmonised rules on insurance guarantee schemes.
Options discarded at an early stage
Further options which could have been considered include an EU-centralisation of
supervision and resolution. However, in view of the outcome of the ESAs review, the
integration of micro-prudential supervision and of resolution is not deemed politically
mature at this stage. Similarly, a further option for policyholder protection in cases of
failure would be the creation of a single IGS for the entire EU. This would increase the
insurance effect of mutualisation and would thus require lower resources from the
30
For the purpose of this problem, the “Home” supervisory authority is the authority of the Member State
where an insurer got its license. The “Host” supervisory authorities are the authorities of the Member
States – other than the “Home” Member State – where an insurer is operating.
31
“Ex ante planning” means that the planning takes place before the adverse situations/conditions
materialize.
Page | 23
insurance industry. However, a single EU-wide IGS would not be consistent with the
existing national micro-prudential supervisory framework.
5.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector
Option label Option description
Option 1: Do
nothing
This is the baseline scenario.
Option 2: make
targeted
amendments to
prevent financial
stability
Under this option, targeted changes would be made to the
framework, in order to incorporate macroeconomic and macro-
prudential considerations in requirements on insurers’ investment
and underwriting activities, and to better monitor liquidity risk.
Option 3:
introduce an
extensive
macro-
prudential
framework
An extensive macro-prudential framework would be introduced,
which would include, in addition to the changes envisaged as part of
Option 2, the power for supervisors to impose systemic or
countercyclical capital buffers, or concentration limits on
investments. This is the approach put forward by EIOPA and the
ESRB.
Options discarded at an early stage
An additional consideration could have been to fully centralise macro-prudential
supervision at European level (e.g. at the level of EIOPA or the ESRB). While such an
approach could be effective in addressing European-wide systemic risks (as systemic
risks do not have borders and coordination of national responses is probably needed to
effectively preserve financial stability in the Union), this idea has been discarded as too
far-reaching. Indeed, the macro-prudential dimension in Solvency II remains limited at
this stage according to some stakeholders. It is therefore needed, as a first step, to
contemplate enhancements of the current set of rules (where deemed justified) before
considering significant changes to institutional/governance arrangements on the use and
implementation of such new tools. In addition, in light of the limited success of the
Commission’s attempt to strengthen the centralisation of micro-prudential supervision by
EIOPA32
, it would be unlikely that the centralisation of macro-prudential supervision
would receive meaningful political support from Member States, before agreeing on the
necessity to embed a macro-prudential dimension in Solvency II.
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO THEY COMPARE?
In this section, each policy option considered (other than Option 1 – “No change”) will
be assessed against the specific objectives presented in Section 4. The baseline scenario
(“Option 1 – no change” of each problem) will not be assessed in this section. The
consequences of doing nothing are outlined in Section 2 of this impact assessment.
32
In the context of the review in 2019 of the Regulation establishing EIOPA.
Page | 24
6.1. Limited incentives for insurers to contribute to the long-term financing and
the greening of the European economy
6.1.1. Option 2: Facilitate long-term investments in equity
Under this option, the eligibility criteria for benefiting from the preferential treatment
applicable to “long-term equity” assets would be loosened, with the aim of expanding the
share of equity investments that can fall under this regulatory asset class. This is the
general approach recommended by EIOPA in its advice. The revised criteria would still
rely on the principle that an insurer may only benefit from a preferential treatment if it is
able to avoid forced selling under stressed conditions. Other criteria would ensure that
insurers have a long-term perspective when making equity investments which they want
to classify as long-term equities.
Benefits
Option 2 would positively contribute to remedying the lack of incentives for insurers to
contribute to the long-term and sustainable financing of the European economy. As
demonstrated in Sub-section 6.1.4 of the Evaluation Annex, although Solvency II is not
the main driver of equity investments, the prudential framework can also bias insurers’
investment behaviours. By relaxing some of the eligibility criteria for long-term
investments in equity (while still ensuring that insurers’ policies incorporate the long-
term perspective in their investment decisions), insurers would be able to apply the
preferential treatment to a wider scope of equities and therefore to increase the amount of
equity investments. In other words, facilitating long-term investments in equity would
imply increasing insurers’ equity exposures. More capital could hence be injected in
businesses, in particular SMEs. In addition, as the greening of the economy also requires
stable financing, a facilitated preferential treatment for long-term investments in equity
could also contribute to financing sustainable activities (indeed, criteria for long-term
equities leverage on the objective of long-term investing time horizon). EIOPA has asked
the industry to quantify the impact of one set of criteria, but its final advice goes further
than what was tested, notably by allowing for more flexibility in the way life insurers
may demonstrate their ability to stick to their investments. Therefore, EIOPA’s impact
assessment (related to the initial set of criteria) provides a lower bound estimate of the
impact of its final advice33
. Therefore, based on those figures, Option 2 could thus result
at least in a doubling of the number of insurance firms which are willing to use the long-
term equity asset class, and a multiplication by almost six of the amount of equities
eligible to a preferential treatment (from € 4.2 billion to € 26 billion). This implies that at
least € 3 billion in capital would become available for covering capital requirements for
further investments in equity (assuming insurers are willing to maintain their solvency
ratio constant).
Option 2 would also have a moderately positive impact on international
competitiveness. Indeed, if insurers are required to establish lower buffers when
investing in equity, they would have more free capital surplus (i.e. excess capital
resources over capital requirements) to expand internationally. The likely beneficiaries
would be the shareholders of insurance companies.
Finally, Option 2 would also allow improving supervisory convergence and level-
playing field by providing more clear-cut and unambiguous criteria to the eligibility of
equities for the preferential treatment.
33
For further details on EIOPA’s impact assessment on the review of the prudential treatment of long-term
equity investments, please refer to EIOPA’s impact assessments, from page 146 to page 160.
Page | 25
Costs
EIOPA’s analysis suggests that the existing calibrations for equity are appropriate and
that financial data do not support the preferential treatment on long-term equity
investments which was introduced by the Commission in 2019. However, EIOPA did not
recommend removing the long-term equity category, but concluded on the contrary that
policyholder protection and risk sensitivity would remain at a very high level if the
revised eligibility criteria remain sufficiently robust and clear. Therefore, Option 2 would
have a moderate negative impact on the risk-sensitivity of the framework (i.e. only in
relation to equity investments). While Option 2 is not aimed at addressing the issue of
volatility, one may note that since equity can prove to be more volatile than other asset
classes, more investments in equity (stemming from the further use of the long-term
equity asset class) could lead to further volatility in insurers’ assets. On the other hand,
those additional (long-term) equity investments would be possible to the extent that the
insurer is able to stick to its investments, including under stressed conditions, and is
therefore not exposed to short term volatility in stock markets. Option 2 could also have a
limited but negative impact on financial stability. Indeed, insurers would have more
incentives to invest in equity, and therefore to hold on average assets with higher risks of
material loss in market value in a short period of time (i.e. more volatile assets). On the
other hand, the prudential criteria would be defined in such way that supervisors have the
assurance that insurers would not be subject to forced-selling of equities at deteriorated
price under stressed conditions34
. Therefore, the revised eligibility criteria would be such
that insurers would not be likely to amplify the negative externalities of an exogenous
shock on stock markets, as they could weather the drop in equity prices due to the long-
term nature of their investments. On balance, it is thus expected that this option would
not generate material systemic risk.
In terms of implementation costs, based on a survey conducted by EIOPA, there would
be significant one-off implementation cost of applying Option 2 in the view of about
20% of participants to the holistic impact assessment. A similar share (24%) are of the
view that there would be material increase in on-going compliance costs. Those costs are
associated with updating IT systems to comply with updated requirements and trainings
to ensure staff is aware of regulatory changes. However, as the criteria are assumed to be
clearer than under current framework, those costs are expected to decrease relatively
quickly over time.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would contribute to removing barriers
to equity investments. Hence, it would enlarge the productive capacity of the economy35
and thus generate welfare. It would also have a positive impact on international
competitiveness as evoked above. Option 2 would generate limited implementation costs
and have limited negative impact on policyholder protection and financial stability, since
the preferential treatment would only be possible if insurers meet a set of robust
eligibility criteria. It is also coherent with the CMU objectives which explicitly refer to
the need to facilitate insurers’ contribution to the “re-equitisation” of the European
34
Insurers would have to demonstrate that they can stick to investments under stressed conditions (i.e. for
instance that they are not exposed to forced selling under assumptions of massive surrenders, and/or that
they could sell other liquid assets if they need to generate cash).
35
As explained in Sub-section 6.1.4 of the Evaluation Annex, insurers provide a lot of debt financing.
However, in order for businesses (in particular SMEs) to expand or grow, they also need to avoid being too
much indebted and thus need capital financing. This is all the more the case in the context of the ongoing
Covid-19 crisis where businesses in several countries had access to grants and loans, but are now facing
high level of indebtedness while facing strong uncertainty in terms of economic outlook.
Page | 26
economy, and overall does not materially affect the risk-based nature of Solvency II
(limited negative effect). Finally, it generates a necessary condition for enabling the
European Green Deal, as “green” assets and activities require long-term funding
including in equity investments, although it must be understood that there is no guarantee
that all insurers’ long term investments are “green”.
Winners and losers: Policyholders would be “winners” to a certain extent. Indeed, despite
limited negative impact on policyholder protection, they may benefit from the moderate
increase in risk-taking by insurers by receiving higher returns on their life insurance
policies as insurance companies would generate higher returns on their investments36
. By
being allowed to take additional risks, insurance companies can generate a higher return
to their shareholders at limited additional costs. The impact of supervisors would also be
positive, as the new criteria would be clearer than the existing ones, making it less
complex to supervise insurers’ compliance with regulatory requirements. Finally,
businesses, in particular SMEs and those conducting green activities, would benefit from
easier access to equity funding by insurance companies.
Stakeholder views: In the context of the Commission’s public consultation, among those
stakeholders who expressed a view on equity financing, more than 50% of stakeholders
consider that the current framework still includes obstacles to long-term investments.
This is particularly the case for insurance companies (66%) and public authorities (75%).
Only 30% of citizens/consumers/NGOs share this view, but the remaining 70%
expressed no opinion on this question. In the context of EIOPA’s technical consultations
on the review, the vast majority of insurance stakeholders support an alleviation of the
criteria on long-term equity, although they may disagree on the very specific criteria that
should be retained.
6.1.2. Option 3: Reduce capital requirements on all equity investments
Under this option, all capital charges on equity would be reduced37
. Therefore, the
average cost of investing in equity would be reduced for all insurers, without any criteria,
and regardless of whether the investment is “long-term” or not. This option, which has
been put forward by a few stakeholders, including public authorities in different Member
States, would be justified by the choice of giving priority to the political objective of
facilitating insurers’ capital financing of the economy, in accordance with the objectives
of the Capital Markets Union Action Plan, even if the lack of evidence to justify such an
approach would be in conflict with the primary objectives of Solvency II, namely
policyholder protection and financial stability.
Benefits
Option 3 would be more effective than Options 1 and 2 in addressing the insufficient
incentives for insurers to contribute to the long-term and sustainable financing of
the European economy. By proceeding to a general decrease in capital requirements on
equity regardless as to whether the investment is intended to be held for the long term or
not, the prudential cost of investing in equity would be materially reduced, which implies
36
In life insurance, many insurance products are subject under national laws or contractual arrangements to
minimum “profit sharing” mechanisms, according to which policyholders are entitled to benefit from some
of the return on insurers’ investments. Therefore, those additional returns cannot in general be just
distributed to shareholders through dividends.
37
A floor would however be set so that capital charges on equity can never go below the current most
preferential treatment (i.e. 22% risk factor). The calculations are relying on information provided by
EIOPA.
Page | 27
a larger amount of additional “free capital” which may be invested in equity38
. EIOPA
did not conduct any impact assessment of this option. However, on the basis of the
quantitative data submitted by insurers to NSAs, and based on simplified assumptions,
one can estimate that a 3 percentage point decrease in capital charges on equity frees
about € 5 billion of capital (which could potentially be used to invest in equity)39
. In
principle, this additional capital could also be invested in “green” assets and therefore
contribute to the objectives of the European Green Deal. However, as no conditionality
would apply, there is no guarantee that capital be invested in climate-friendly activities,
or even in equity more broadly. Option 3 would also be more effective than the previous
options in improving EU insurers’ competitiveness at international level and thus
benefitting insurers and their shareholders. Option 3 would free-up more capital than
under Option 2, which could be used to expand internationally and thus generate
additional profit for insurance companies.
Finally, depending on the way this option is implemented, Option 3 could have a positive
impact on the simplification of the framework. Indeed, if capital requirements on all
equity investments were lowered to the same level regardless of their nature, this would
materially simplify the framework by removing the existing patchwork of regulatory
asset classes of equity investments (currently, they are at least eight different classes of
equity investments in Solvency II).
Costs
Option 3 would materially reduce the risk-sensitivity of the framework. EIOPA notes
that calibrations of capital charges on equity investments are already lower than what it
advised when finalising the Solvency II framework before 2016. Therefore, a further
general decrease in capital requirements on equity investments would not be justified
based on available evidence. In addition, a general decrease of capital requirements in
equity investments regardless of their nature (listed or unlisted equity, strategic or not
strategic, etc.) would undermine the risk-based nature of the framework. This would also
affect policyholder protection, by incentivising insurers to take much more risks, with a
greater likelihood of insurance failure.
While not aiming at affecting volatility, the expected effect of Option 3 is to dramatically
increase insurers’ exposure to equity. As equity investments prove to be relatively more
volatile than other asset classes, a significant increase in equity exposures would
probably make insurers’ assets, and therefore solvency positions, materially more
volatile.
Option 3 would imply a deviation from the risk-based approach whereby capital
requirements are calibrated using evidence on their riskiness. This may cause supervisory
authorities to pursue other tools to address the potential underestimation of the risk in the
calculation of capital requirements, such as intensified supervisory monitoring, or even a
capital add-on or requests by the supervisory authority to calculate capital requirements
with an internal model that models equity risk in a fully risk-based manner. In such a
scenario, the tools chosen by supervisory authorities are likely to differ and the option
would therefore be detrimental to the consistency and coordination of supervisory
practices and thus undermine the Single Market for insurance services. On the other
38
The capital gains could also be used to invest further in any other asset class. However, it is expected the
lower relative cost of investing in equity for a given amount of capital resources available would
incentivise insurers to invest a larger share of their investment portfolio in equity, which are supposed to
provide higher returns than some other asset classes (e.g. bonds).
39
The assumptions include the setting of a floor of 22% for capital charges on equity, and a level of
diversification benefits in capital requirements of 45%.
Page | 28
hand, Option 3 would simplify the prudential framework for equity investments
compared to the current situation where criteria for long-term equities are subject to
interpretation40
. Therefore, the Option 3 would allow simplifying the framework, but
at the cost of materially increasing risk exposure by insurers.
Option 3 would have a potential very negative impact on financial stability. By
proceeding to a general decrease in capital requirements which would not be supported
by quantitative evidence (but would be justified by the priority given to achieving the
CMU objectives over the primary objectives of the Solvency II Directive), Option 3
would provide wrong risk-management and investment incentives to insurance
companies. The risk of excessive risk-taking (search for higher return) could generate
bubbles and would expose insurers to sudden trend reversals in stock markets. In
addition, Option 3 could imply windfall effects by generating an immediate broad
increase in free capital, which could be simply used by insurers to make more dividend
distributions to shareholders or share buy-backs instead of providing additional funding
to the real economy. This risk is material. Option 3 would allow reducing capital
requirements without any change in insurers’ behaviours. This would imply that without
any change in the risk profile, the average solvency ratio could be maintained constant
despite the level of capital resources would be reduced due to opportunistic higher
dividend distributions. In comparison, this risk would be deemed minor in Option 2
because in order to benefit from a capital relief, insurers would still have to revise their
internal investment policies and change their approach to equity investments so as to
embed long-termism in their investment decisions. They would also have to document
their ability to stick to their investments under stressed situations (which implies that
their solvency ratio would be sufficiently high to not be subject to forced selling of
equities with the aim to de-risk their investment portfolio and reduce capital
requirements). Therefore, opportunistic dividend distributions would be less likely or
would make it more difficult for insurers to demonstrate their intention and ability to
invest for the long term.
As regards implementation costs, although there is no available data, as this option
could simplify the framework, it is expected that the one-off implementation cost would
be lower than in Option 2 (need to update IT systems) and the on-going implementation
costs would be almost null (simplified approach compared to today).
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would probably be the most effective
in removing barriers to equity investments, and improving insurers’ international
competitiveness, but at the cost of materially deteriorated policyholder protection and
risk sensitivity and higher financial stability risks. There would also be a lack of
coherence with the primary objective of Solvency II (policyholder protection). Also, the
CMU Action Plan highlights that the facilitation of insurers’ long-term sustainable
financing of the economy should not be to the detriment of financial stability.
Winners and losers: In the short term, policyholders would probably benefit from the
increased risk-taking by insurers by receiving higher returns on their life insurance
policies as insurance companies would generate higher returns on their investments.
However, in the long run, they would be the losers due to the higher risk of failure of
their insurer. Insurers and their shareholders would be the winners as insurance
40
For instance, one of the criteria is that the insurer is able to avoid forced selling of equities in stressed
situations. However, the current framework does not specify how to demonstrate that this criterion is
fulfilled.
Page | 29
companies would have more free capital to invest (and therefore higher return to pay to
shareholder) with no conditionality. On the other hand, it is clear that in the long run, if
excessive risk taking in equity leads to an insurance failure, this would be detrimental to
shareholders. For supervisory authorities, while this approach would probably simplify
the supervision of compliance with regulatory requirements, this would also require more
active supervisory dialogue with insurers in order to compensate the higher risk of failure
stemming from potential excessive risk-taking. This would also entail the need for a
more active macro-prudential supervision.
Stakeholder views: The same remarks as in Option 2 apply as regards the need to bring
changes to the prudential framework on equity. The principles embedded in Option 3
have not been formally consulted by EIOPA. However, while it can be expected that a
majority of insurance stakeholders would support Option 3, only a minority of
supervisory authorities expressed interest in such an option. In addition, in the context of
the Commission’s consultation, several stakeholders, including
citizens/consumers/NGOs, highlighted the need to ensure that the changes brought to
Solvency II do not generate financial stability risks (which may imply dismissing Option
3).
6.1.3. Option 4: Strengthen “Pillar 2” requirements in relation to climate
change and sustainability risks
Under this option, qualitative requirements on risk-management would be strengthened
in order to ensure that insurers appropriately monitor, manage and mitigate climate
change and sustainability risks as indicated by EIOPA in an opinion. While earlier
initiatives already require insurers to take into account sustainability risk in their
disclosures and risk management, those initiatives do not ensure that the sustainability
risks are taken into account in insurers’ business strategy. Option 4 would imply
integrating longer-term scenario analysis in relation to climate change in the own risk and
solvency assessment. The own risk and solvency assessment aims, among others, to
address risk that are not well reflected in the calculation of capital requirements and more
generally risks that are hard to quantify, like risks related to climate change. By
clarifying the relevance of climate change risks in the own risk and solvency assessment,
Option 4 would ensure that those risks are taken into account in insurers’ business
strategy. The option would also aim to ensure insurers put in place internal procedures to
avoid overreliance on data from past events with respect to climate change-related risks.
Further details are provided in Section 1 of Annex 8. However, no changes would be
made to capital requirements for sustainable investments. Instead, EIOPA would for the
first time receive a legal mandate similar to the European Banking Authority’s mandate
in Regulation (EU) 575/2013, Article 501c, point (c). In particular, EIOPA would be
asked to monitor the evidence on the riskiness of sustainable investments and, where
justified, propose changes to Solvency II capital requirements.
Benefits
Option 4 would have a positive impact on policyholder protection and some positive
impact on funding for the sustainable recovery of the EU. Stronger qualitative
requirements on the management of climate and environmental risks would set incentives
to reduce exposure to such risks on the asset and liability side of the balance sheet. As
regards the asset side, a reduction to sustainable risks can be achieved by a shift to
“green” investments. Furthermore, EIOPA’s work under a new mandate may provide
evidence on lower riskiness of some or all sustainable investments. In that case, the
Commission would be in a position to use existing empowerments for delegated acts to
Page | 30
amend Solvency II capital requirements accordingly. Option 4 would also have limited
(but possibly positive) impact on the consistency and quality of supervision. The lack
of references to sustainability risks in the Solvency II Directive may result in varying
approaches by supervisors to sustainability risks in the own risk and solvency
assessment, in particular since sustainability risks can materialise via more traditional
financial risk. Further clarification of the qualitative rules could achieve better
harmonisation.
Finally, as indicated in Sub-Section 6.3.3 of the Evaluation Annex, EIOPA’s insurance
stress test from 2018 suggested that there is currently only a small likelihood of systemic
impact of natural catastrophes on the insurance sector. However, climate change may
lead to such risk becoming systemic in the future. Likewise, the materialisation of
transition risks and assets exposures to entire sectors of the economy possibly “stranded”
assets may translate in systemic impacts on the insurance industry. The longer-term
scenario analysis required under Option 4 would lead to an earlier identification of assets
that could become stranded and a reduction of transition risks for the insurance sector.
Option 4 would therefore have a positive impact on financial stability.
Costs
In terms of implementation costs, insurers would have to build up the capacity to
comply with new qualitative requirements on sustainable risks without the ability to
benefit from lower capital requirements. This might also result in higher costs of
compliance with Solvency II rules, which could be passed on to consumers by increasing
insurance premiums. In the context of previous initiatives, the costs of ESG integration
for small entities was estimated to range from EUR 80 000 to EUR 200 000 per year (for
buying external data, doing additional internal research, engagement with companies
etc.)41
. However, insurers already need to build up such or similar capacities to comply
with other legal acts, notably the disclosure requirements under Regulation (EU)
2019/2088 and amendments to the delegated acts under the Solvency II Directive42
. The
additional cost of Option 4 is therefore estimated to be significantly below that range and
thus overall limited.
Option 4 would have no or very limited impact on risk sensitivity, volatility and
proportionality.
Overall assessment
Effectiveness, efficiency and coherence: Option 4 would improve the incentives for
sustainable investment and the management of environmental and climate risks. Option 4
is the most effective in the harmonisation of supervisory practices in the context of
sustainability risks. It is of course coherent with the objectives of the European Green
Deal.
Winners and losers: Policyholders would benefit from a higher level of protection due to
better management of environmental and climate risks under this option. Supervisors and
insurance companies would be given a clearer set of rules to ensure the integration of
environmental and climate risks.
41
See SWD(2018) 264, page 47 (link)
42
Delegated Regulation (EU) 2021/1256 amending Delegated Regulation (EU) 2015/35 as regards the
integration of sustainability risks in the governance of insurance and reinsurance undertakings (OJ L 277,
2.8.2021, p. 14)
Page | 31
Stakeholder views: During the Commission’s public consultation, respondents chose a
contribution to the European Green Deal as the overall third most desirable objective for
this initiative among a list of eight possible objectives. To that end, more than 70% of
NGOs and public authorities supported strengthening “Pillar 2 requirements” in relation
to sustainability risks.
6.1.4. Option 5: Strengthen “Pillar 2”requirements and incorporate climate
change and sustainability risks in quantitative rules
Under this option, the changes to qualitative requirements as under Option 4 would be
combined with lower capital requirement for green assets. In an analysis conducted in
2019, EIOPA concluded that the available evidence is not sufficient to conclude that
sustainable investments are less risky than other investments43
. Under this option, capital
requirements would therefore not be fully reflective of risk characteristics, but depend on
the “green” nature of investments. With all else being equal, insurers investing more in
“green” assets would have a better solvency position than those with a lower share of
green assets.
This option has been put forward by a few stakeholders and would be justified by the
priority given to the political objective of the European Green Deal. More specifically,
the option would aim to facilitate insurers’ financing of the transition to carbon-neutrality
even though the lack of evidence to justify such an approach would be in conflict with
the primary objectives of Solvency II, namely policyholder protection and financial
stability.
Benefits
Option 5 would be more effective than Options 4 (as well as the baseline) in
incentivising sustainable investments by insurers. By proceeding to a decrease in
capital requirements, the prudential cost of sustainable investments would be materially
reduced. As described under Option 3, insurers would be able to hold a larger volume of
sustainable investments with the same amount of regulatory capital. But insurers could
also maintain their asset allocation and use capital no longer tied up otherwise. Similarly
to Option 3, Option 5 would also contribute to improving EU insurers’
competitiveness at international level. Option 5 would free-up more capital than under
Option 4, which could be used, among others, to expand internationally and benefit
insurers and their shareholders.
Costs
As mentioned above, such changes to capital requirements might not reflect the risk
characteristics of such investments and have a very negative impact on the risk-
sensitivity of the framework. This would also affect policyholder protection, by
incentivising insurers to take much more risk, with a greater likelihood of failures of
those companies. In addition, Option 5 would imply a deviation from the risk based
approach whereby capital requirements are calibrated using evidence on their riskiness.
This may cause supervisory authorities to pursue other tools to address the potential
underestimation of the risk in the calculation of capital requirements. In such a scenario,
the tools chosen by supervisory authorities are likely to differ and the option would
therefore be detrimental to the consistency and coordination of supervisory practices
and thus undermine the Single Market for insurance services.
43
EIOPA: Opinion on Sustainability within Solvency II (EIOPA-BoS-19/241), September 2019, see in
particular paragraphs 4.23 to 4.30.
Page | 32
Option 5 would also have a negative impact on financial stability. Changes to capital
requirements which are neither evidence-based nor risk-based, provide wrong risk-
management and investment incentives. Therefore, the option could result in too high
overconfidence by investors and generate bubbles with respect to sustainable
investments.
Implementation costs are expected to be limited. Although there is no available data,
Option 5 would require updating IT systems so that they reflect the new risk factors for
green investments, which represents a limited one-off cost. The ongoing cost would be
limited as the granularity of information required for computing capital requirements
would be consistent with that required for green disclosures under other EU legislations.
Finally, Option 5 would have a potential deadweight effect, as it would lead to a decrease
in capital requirements with no conditionality. As such, there is no guarantee that the
additional “free capital” would be used to provide further investments to the economy,
and it may be an opportunity for insurers to make higher dividend distributions.
Overall assessment
Effectiveness, efficiency and coherence: Option 5 would be as effective as option 4 on
the management of environmental and climate risks and it would be the most effective in
incentivising sustainable investment. Moreover, changes in capital requirements could
have a more immediate impact on incentivising sustainable investments than a sole
reliance on the incentives stemming from rules on the own risk and solvency assessment
under option 4. However, beyond investment incentives, Option 5 might result in
negative impacts related to lower policyholder protection and increased financial stability
risks. This option may therefore lead to economic welfare losses and contradict the two
main objectives of Solvency II. Furthermore, it has to be noted that the European Green
Deal states the objective of integrating climate and environmental risks into the EU
prudential framework whereas it leaves open the outcome of the assessment of the
suitability for green assets of capital requirements.
Winners and losers: Under Option 5, policyholders and supervisors would be losers.
Although in the short run policyholders may benefit from higher return on their policies
if insures take more risks, they would suffer in the long run from a lower level of
protection. Supervisors would be confronted with having to address a potential
underestimation of actual risk in the calculation of capital requirements. Insurers would
benefit from lower capital requirements for sustainable investments – and their
shareholders may hence benefit from higher dividend distributions – but also need to
integrate environmental and climate risks in their own risk and solvency assessment.
Stakeholder views: In the Commission’s public consultation, many more respondents
objected lower capital requirements for sustainable investments (around 44%) than those
that expressed support (around 29%). The share of objecting responses is particularly
high among the insurance industry (around 51% objecting vs. 29% supporting) and
public authorities (75% objecting vs. 13% supporting).
6.1.5. Choice of preferred options
The below tables provide a high-level summary of how the previously described options
compare (note that for the sake of readability of the tables, the labels of the options have
been shortened).
Page | 33
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financial
stability
Option 1 – Do nothing 0 0 0 0 0 0 0 0
Option 2 – Facilitate
long-term investments in
equity
++ - 0 0 + - ++ ++
Option 3 – Reduce capital
requirements on all
equities
+++ --- 0 + - --- -- --
Option 4 – Strengthen
“pillar 2 requirements”
in relation to climate risks
+ 044
- 0 + ++ + ++
Option 5 – Integrate
climate risks in both
“pillar 2” and
quantitative rules
++ -- -- 0 -- -- -- -
Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 ++ +/- +
Option 3 +++ -- +
Option 4 - +++ +
Option 5 +/- +/- +/-
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
In relation to long-term equity financing, Option 2 appears to be the most suitable option.
While Option 3 would be more effective in fostering long-term financing of the
economy, it would be at the cost of material reductions in policyholder protection, risk
sensitivity and of higher risks to financial stability. On the contrary, Option 2 would have
a lower impact on investment behaviour but generate limited side effects on policyholder
protection and financial stability, while having a meaningful impact45
.
In relation to the greening and the sustainable financing of the economy, while Option 5
seems to be the most effective in achieving the objective, it would have similar negative
side effects on policyholder protection, risk sensitivity and financial stability. On the
contrary, Option 4, while providing less incentives, would improve the way insurers
incorporate sustainability and climate change risks in their underwriting and investment
activities. In addition, it would have either a positive or a neutral impact on all specific
objectives of this review.
The combination of Option 2 and Option 4 allows addressing the problems without
generating undue costs or redundancies. Indeed, Option 2 would provide positive
incentives for insurers to have a longer-term perspective when making equity
investments, while Option 4 would ensure that climate change and sustainability
considerations are fully incorporated in insurers’ processes. Therefore, the combination
44
While Option 4 has a positive impact on policyholder protection, it is not deemed to have a positive
impact on the specific objective of risk-sensitivity as referred to in section 2.2.
45
As a reminder, as EIOPA’s set of criteria in its final Opinion differs from the ones tested as part of the
data collection exercises, the estimate of the quantitative impact only provides a lower boundary of the real
impact of EIOPA’s proposal (and therefore of Option 2).
Page | 34
of the two options would facilitate insurers’ contribution to the long-term and sustainable
financing of the economy. Each option taken individually would however not be
sufficient. Indeed, even if Option 2 can contribute to the greening of the economy, asset
classes other than equity can be “green investments” but would not benefit from Option
2. Reciprocally, incorporating climate change risks in investment decisions neither
guarantees that insurers refrain from making shorter-term investments (and therefore
from not providing sufficiently stable funding to the real economy), nor removes
obstacles to equity investments generated by prudential rules. In particular, some studies
suggest that capital financing is more effective than debt financing in achieving a
reduction of greenhouse gas emissions46
. The combination of Options 2 and 4 would
ensure that insurers face no prudential obstacles to the provision of long-term funding to
SMEs and that they appropriately value the long-term added value of investing in green
assets.
For all those reasons, the preferred options to address Problem 1 are Option 2
(Facilitate long-term investments in equity) and Option 4 (Strengthen “Pillar 2”
requirements in relation to climate change and sustainability risks).
6.2. Insufficient risk sensitivity and limited ability of the framework to mitigate
volatility of the solvency position of insurance companies
6.2.1. Option 2: Fix all technical flaws in relation to risk sensitivity and
volatility
Under this option, all changes that are technically justified and aiming to address the lack
of risk-sensitivity and the excessive volatility would be adopted:
 In relation to risk sensitivity, in line with EIOPA’s advice, Solvency II would be
amended to ensure that the protracted low interest rate environment is
appropriately reflected in capital requirements (allowance for interest rates to
become negative in quantitative rules) and in the valuation of long-term insurance
liabilities.
 In relation to volatility, the long-term guarantee measures (in particular, the
volatility adjustment) would be amended so as to ensure that short-term volatility
in credit spreads which does not reflect economic fundamentals (i.e. the part of
volatility corresponding to “irrational” market movements)47
does not result in
excessive volatility in solvency ratios, but also that there is no “over-shooting
effect” (i.e. that the adjustments do not result in the insurer being “better off”
during crises than under normal conditions).
Benefits
Option 2 would by nature significantly improve risk-sensitivity of the framework and
reduce its volatility. The integration of negative interest rates in standard formula capital
requirements would imply that insurers have to address a risk, which amounts
approximately € 20 billion48
. This additional risk sensitivity would therefore improve
policyholder protection. Option 2 could also be very efficient in enhancing the
46
See e.g. Ralph De Haas, Alexander Popov: Finance and carbon emissions, ECB Working Paper Series,
No 2318 / September 2019 (link).
47
Solvency II distinguishes two components of credit spreads. The part corresponding economic
fundamentals (risk of default and cost of downgrade) should not be compensated as this is a real risk for
insurers. The rest, which corresponds to “short-term” or “irrational” market movements in spreads, could
be subject to compensation in view of the long-term nature of insurance liabilities. The volatility
adjustment aims to mitigate the effect of that second component of spreads on insurers’ solvency.
48
Source: Page 54 of EIOPA’s impact assessment.
Page | 35
volatility-mitigating effect of the long-term guarantee measures for insurers located in
Southern countries with higher spreads. As explained in Sub-section 6.1.1 of the
Evaluation Annex, insurers’ bond portfolio is subject to a Home Bias, i.e. they mainly
invest in bonds of their Home Member State. When such a Member State is subject to
more volatile spread movements that the rest of the Euro Areas, the sole “currency
volatility adjustment” (i.e. the one applicable to all euro-denominated liabilities) is not be
sufficient in mitigating spread volatility. Actually, EIOPA’s proposals would allow
triggering more frequently a “country-specific” adjustment, which aims to capture spread
crises arising in certain Member states and not in the whole Euro area. According to
EIOPA’s assessment, applying retroactively the proposed amendments during the period
from 2007 to 2019, insurers would have resulted in a more frequent and more significant
adjustment than under current rules:
Greece Italy Spain Portugal
Number of quarters where the country adjustment is
triggered under current rules
26 3 6 12
Number of quarters where the country adjustment is
triggered under new rules
29 15 19 14
Average increase in the level of the adjustment between
current rules and Option 2 (the higher the percentage, the
higher the volatility mitigating effect)
+40% +35% +59% +78%
Option 2 would also achieve reducing “overshooting effects” described in the same Sub-
section of the Evaluation Annex, i.e. the fact that in some cases, under crisis situations,
the volatility adjustment “over-compensates” the negative effect of increases in credit
spreads, leading to an undue improvement in insurers’ solvency position under stressed
environments. Following EIOPA’s advice, Option 2 would reduce that risk, by
decreasing the level of the volatility adjustment where such risks are most likely to
occur49
. For instance, a reduction factor of 56% would be applied on average to the
volatility adjustment in Netherlands to prevent this risk.
Option 2 would have a positive impact on financial stability for two reasons. First, by
better reflecting the risk of low interest rates, it would reduce incentives for excessive
search-for-yield behaviours and ensure that there is no widespread underestimation of
insurers’ liabilities towards policyholders. Indeed, insurers would have to set aside more
capital in case of risky asset-liability management (i.e. if there is a significant duration
mismatch) and the level of their liabilities towards policyholders would better reflect the
low-yield environment so that there is no overestimation of insurers’ own funds. In
addition, by ensuring a lower volatility of the framework, Option 2 would reduce the risk
of procyclical behaviours (e.g. the risk of wide-spread fire-sale of risky assets at
depressed prices during down cycles).
Costs
Option 2 would overall have a negative effect on the ability of insurers to provide
long-term and sustainable financing to the European economy. Although it would
reduce volatility, Option 2 would also lead to an immediate material increase in capital
requirements. According to Commission services’ calculations based on EIOPA’s impact
assessment report:
- If applied at the end of 2019, Option 2 would lead to a decrease in solvency ratios
by 13 percentage points (from 247% to 234%). This still represents a decrease in
49
There are different sources of “overshooting”, but one of them occurs when insurers’ own are more
sensitive to spread variations than insurers’ liabilities. Option 2 would be designed in such a way that it
reduces the level of the volatility adjustment in such situations.
Page | 36
“free surplus capital” of €15 billion for the sample of insurers which participated
to the data collection exercise (decrease of approximately 5% in the surplus). If
scaled up to the whole market, EIOPA estimates that the impact would be a
decrease in capital surplus of EUR 18 billion.
- If applied at the end of the second quarter of 2020, when interest rates were even
lower, the decrease in solvency ratio would be of 22 percentage points (from
226% to 204%), but 35 percentage points for life insurers (from 223% to 188%).
This represents a decrease in available surplus for insurers which participated to
the data collection exercises by EIOPA of approximately EUR 40 billion
(approximately -11%), largely concentrated on life insurers. If scaled up to the
whole market, EIOPA estimates that the impact would be a decrease in capital
surplus of EUR 55 billion. The situation widely varies between Member state:
Some countries overall benefit from the technical changes (e.g. Cyprus, Spain,
Malta and Latvia), but others are materially affected (with more than 25
percentage points decrease in solvency ratios in Austria, Germany, Netherlands,
and Norway).
Indeed, despite the revision of the features of the volatility adjustment, which allows
improving free capital in mid-2020 by € 13 billion, as well as other technical changes
improving solvency ratios50
, the reflection of negative interest rates in capital
requirements and the valuation of insurance liabilities towards policyholders generates a
€ 81 billion decrease in available capital surplus at EEA level.
One could argue that a more stable solvency ratio could still facilitate insurers’ long-term
investments by allowing for more stability and foreseeability. However, the material
reduction in free excess capital to make additional investments is such that it would
overall be detrimental to achieving the objective of long-term sustainable financing of the
European economy. This deterioration in solvency ratios would amplify the deterioration
stemming from the ongoing Covid-19 crisis. Option 2 would also be detrimental to the
international competitiveness of the European insurance industry as a lower amount of
available capital offers less opportunities for insurers to expand their business
internationally.
Similarly, lower volatility would on its own have a positive impact on insurers’ ability to
make long-term investments and to offer products with long-term guarantees. However,
the material increase in capital requirements that would also stem from Option 2 would
imply that insurers have a lower ability to offer life and pension insurance products with
guarantees, which are still highly appreciated by insurers, as such products generate more
capital requirements. Insurers would be incentivised to shift risks to policyholders (via
unit-linked products) and as such would act more as asset managers rather than as “risk
managers”.
Overall, Option 2 would make the framework more complex for all insurers in the
scope of Solvency II. For instance, the level of the volatility adjustment is currently
determined centrally by the Commission, based on inputs provided by EIOPA. Under
EIOPA’s revised approach, the level of the adjustment would depend on insurers’
characteristics (for instance, insurers would have to quantify the sensitivity of their assets
and liabilities to changes in spread levels). EIOPA’s proposals also imply that each
insurer would have to establish a typology of insurance liabilities in order to determine
the level of the volatility adjustment. This additional burden generates disincentives for
insurers to apply this adjustment, which is easy to use under current rules, and this could
50
+ EUR 23 billion due to revised approaches to calculate the risk margin, and revised assumptions on
correlations between the different risks that insurers are facing.
Page | 37
have a negative effect on the volatility of their solvency ratios if they are deterred from
applying the new volatility adjustment. The introduction of a new method for the
valuation of insurers’ long-term liabilities could also increase complexity.
However, based on EIOPA’s survey, depending on the specific change considered within
Option 2, implementation costs seem to be moderate. Indeed, between 11% and 39% of
respondents consider that there would be a significant one-off implementation cost, and
between 7% and 33% think that there would be significant on-going costs. However, one
has to note that this survey covered the largest insurers in each national market, possibly
biasing the answers. Almost half of supervisory authorities estimate that they would also
face significant one-off cost stemming from Option 2 (according to a survey included in
EIOPA’s impact assessment), and 43% of them consider that the ongoing costs would
remain significantly higher than under current rules.
Option 2 would have limited (but possibly negative) impact in improving the
consistency of supervision. The increased complexity of the framework may require
more supervisory discretion and expert judgement, with possible divergences in the
application of the rules. This would require EIOPA to use its “soft convergence tools” to
ensure a harmonised implementation of the rules. Ability of supervisors to ensure
compliance with new rules would require more on-site inspections, and the effectiveness
of the supervision of new rules would therefore depend on public authorities’ resources
to allocate to such on-site activities.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would be effective in improving the
risk sensitivity and mitigating the volatility of the framework. It would also materially
improve the level of policyholder protection and financial stability, by ensuring that the
solvency position of insurers appropriately takes into account all risks that they are
facing, and reflect the new low-yield environment. However, Option 2 would imply high
capital cost as insurers would be subject to significantly higher capital requirements.
Lower free capital available for insurers implies a lower ability to contribute to the long-
term financing of the economy and makes it more challenging to offer insurance products
that meet consumers’ demand (in particular, long-term life and pension insurance
products with a certain level of guarantees). While insurers’ average solvency ratio
would remain largely above what is required by quantitative rules (above 200% even if
we apply Option 2)51
, they may still be under pressure by financial markets participants
to issue new capital and debt instruments (for instance in order to maintain their credit
rating). At this stage, and due to the low-yield environment, access to capital markets can
be done at low cost, but there is no guarantee that such favourable conditions would
persist in the long run. Option 2 would also make the framework more complex. By
deteriorating the international competitiveness of the EU insurance industry, this would
also contradict the objectives set out in the CMU Action Plan of a balanced review.
Therefore, while Option 2 is fully coherent with the primary objectives of Solvency II
(policyholder protection and financial stability), it conflicts with other political objectives
of the Union.
51
The actual impact on the changes on each individual changes may widely vary, also taking into account
the current solvency ratios. By the end of 2019 and by mid-2020, only 10% of insurers that are reporting on
a quarterly basis had a ratio, which is lower than 140%. If implemented at the end of 2019, Option 2 would
not have led to any breach in solvency ratios according to EIOPA’s impact assessment (p.46). If
implemented during the Covid-19 crisis in mid-2020, EIOPA indicates that five life companies would not
comply with their solvency capital requirements. However, none of them would breach the “minimum
capital requirement”, and there would therefore have no risk that they lose their license.
Page | 38
Winners and losers: The effect on policyholders is unclear: They would benefit from an
improved level of policyholder protection, but, as explained above, would experience the
negative impact of reduced access to insurance products that meet consumers’ demand.
In particular, insurers would be incentivized to further shift risks to policyholders, which
implies that they depart from their role of “risk managers” and behave more as asset
managers. Insurers would be materially affected due to the material deterioration in their
solvency ratios, despite the reduced volatility of the framework stemming from Option 2.
Their ability to generate return to shareholders and to expand internationally would be
reduced. Finally, the situation is mixed for supervisors, which would have more comfort
in the ability of the framework to protect policyholders and prevent systemic risk, but at
the cost of more complexity (therefore more difficulties in ensuring an appropriate and
harmonized supervision of compliance with regulatory requirement).
Stakeholder views: If we exclude those who did not express an opinion, 78% of
participants to the Commission’s public consultation believe that the framework does not
appropriately mitigate volatility and 64% that it generates procyclical behaviours. This is
the majority view among insurance stakeholders and citizens/consumers/NGOs. Views
are more split among supervisory authorities where only 50% of respondents indicate
that the framework does not appropriately address volatility and 38% that it generates
procyclical behaviours. As regards risk sensitivity, EIOPA’s technical consultations
confirm that a vast majority of (insurance) stakeholders concur with the view that the
current framework does not appropriately reflect the risk of negative interest rates in
capital requirements, although views are more split regarding the technical approach to
address this issue. Most stakeholders also believe that the review of Solvency II should
lead to a balanced outcome in terms of quantitative requirements. Therefore, as Option 2
addresses the identified issues, but at the cost of significantly higher capital requirements,
such an option would receive very limited if not hardly any support from stakeholders.
6.2.2. Option 3: Address issues of risk sensitivity and volatility while balancing
the cumulative effect of the changes
Under Option 3, the changes envisaged under Option 2 would be phased in over a certain
period of time, to limit their immediate negative impact on quantitative requirements. In
particular, changes on interest rates would be only progressively introduced over a period
of at least 5 years. In addition, some additional measures (notably in relation to the so-
called “risk margin”) and small modifications to the design of the volatility adjustment
(in order to slightly increase its level and simplify its functioning52
) would be taken in
order to mitigate (part of) the long-term increase in capital requirements resulting from
those changes. While the final outcome depends on the effective calibration of the
different parameters53
, the working assumption under this approach is that the average
level of quantitative requirements at EEA level would be materially reduced in the short
term (as the changes with a positive impact would be implemented immediately whereas
those with a negative impact would only gradually apply). In the longer run, the level of
52
In a nutshell, compared to EIOPA’s approach, the volatility adjustment would not include a “reduction
factor” to account for the features of liabilities (whether they are predictable or not). A brief outline of the
reasons for removing such a factor is provided in Section 2 of Annex 8. Removing this reduction factor
would reduce insurers’ liabilities towards policyholders and therefore release between € 5-10 billion of
additional “free capital”.
53
In particular, the Commission services are considering implementing the amendments on interest rate
risk in a slightly different manner from what EIOPA proposed, so that the approach to stressing the risk
free interest rate curve is more in line with the approach used to derive the regular risk free interest rate
curve. For the purpose of quantifying the impact of Option 3, this revised approach will be taken into
account.
Page | 39
quantitative requirements at EEA level would remain lower than under current rules,
although the framework would allow for a better risk attribution. The extent of this
decrease depends on market conditions.
Benefits
Option 3 would have a positive impact on the ability of insurers to provide long-term
and sustainable financing to the European economy over time. 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 more than balanced at EU level (insurers’ own funds
in excess of capital requirements would increase54
), there would be limited impact on
insurers’ ability invest in the real economy, and this limited impact would in any case not
offset the positive effect of reduced volatility55
. In addition, the progressive
implementation of the changes with very negative impact would actually lead in the short
term to a very significant improvement in the solvency position of insurers, which
releases capital (up to € 90 billion of additional capital resources in excess of capital
requirements) to provide financing to the economic recovery of the EU. However, there
is no guarantee that such capital relief is not used by insurers to reduce their level of
capital by making additional dividend distributions or proceeding to share buy-backs.
Taking into account the incremental implementation on the changes on interest rates, the
insurance sector would start with an increase in capital resources in excess of capital
requirements of up to € 90 billion56
immediately after the review compared to capital
resources under current rules (assuming similar economic conditions as at the end of
second quarter of 2020). While the sector’s capital resources would increase during the
most important period for the post-Covid economic recovery, this increase in capital
resources would reduce during every year of the phasing in period. At the end of the
phasing in period, Option 3 would still maintain an estimated increase in capital
resources by € 30 billion in an economic environment similar to that at end of 2019. If
the economic environment is similar to that at the end of mid-2020, Options 3 would
lead to a € 16 billion increase in capital resources in excess of capital requirements
(whereas under EIOPA’s advice – as described in Option 2 – capital resources in excess
of capital requirements would decrease by € 55 billion)57
.
Option 3 would by nature significantly mitigate undue volatility. It would also
improve risk sensitivity, but only in the long term, in view of the phasing-in approach
to the implementation of the changes. Therefore, in the short term, the improvement in
risk-sensitivity would remain very limited. Moreover, the additional “counterbalancing”
measures (e.g. revision of some parameters underlying the risk margin calculation) that
54
It is more difficult to assess the impact in terms of solvency ratios. However, the Commission services
estimate that Option 3 would not change solvency ratios by more than a few percentage points on average
at EEU level
55
This is different from Option 2 where the increase in capital requirements is significant, and this impact
offsets the benefit of mitigated volatility.
56
See next table for further details. Under market conditions similar to those at the end of the second
quarter of 2020, the overall impact of the proposed changes would be +8 billion for the sample. By phasing
in the changes on interest rates which will eventually increase capital requirement by € 73 billion, Option 3
would generate a short-term capital relief of +€ 81 billion for the sample. When extrapolating this figure to
the whole EU market, we end up with a capital relief of more than € 90 billion. Source: Commission
services’ calculations on the basis of data and analysis provided by EIOPA.
57
Actually, by the end of the phasing-in period, the capital relief is expected to be even higher, as the
volume of generally older insurance policies with high guaranteed rates will eventually be replaced by
newer business, which typically has less generous guarantees. This implies that when fully implemented,
the amendments on interest rates will be less impactful than if they were fully applied immediately.
Page | 40
would be taken in order to mitigate the negative impact from the other changes aimed to
improve risk sensitivity would lead to a slightly lower level of prudence compared to
Option 2. In other words, Option 3 would be less conservative than Option 2 in very
targeted areas. Those changes would be justified by the greater emphasis on the objective
of preserving international competitiveness of the European insurance industry than in
Option 258
, even if that leads to a slightly lower level of policyholder protection in
comparison with Option 2. Still, the revised calibrations would remain justified to a
certain extent by quantitative evidence59
, although the limited robustness of that evidence
could also have justified not lowering some parameters. In addition, it should be
underlined that Option 3 is a clear improvement in policyholder protection and risk
sensitivity in comparison with the baseline scenario. While the overall level capital
requirements would decrease compared to the baseline, Option 3 allows for a better risk
attribution by acknowledging the materiality of risks in relation to interest rates, while
adapting other components of the framework where it could be argued that the current set
of rules is overly prudent.
Finally, Option 3 would have a positive impact on financial stability, although less
immediate and less material than in Option 2. Indeed, the choice of making
“compensating changes” to counterbalance the negative impact of the amendments
stemming from Option 2 would make the disincentives against excessive risk taking less
effective than under the previous option, while still having a positive impact compared to
the status quo (baseline – Option 1). In addition, the phasing-in of the changes on risk
sensitivity implies that financial stability risks remain until the amendments are fully
implemented (possibility to understate the impact of the low-yield environment in the
short term). Still, in the long run, the preservation of financial stability would be
improved, all the more that the reduction in the volatility of the framework would avoid
procyclical behaviours.
In summary, the below table provides the comparative impacts of Options 2 and 3, for
the sample of insurers which participated to the data collection exercise by EIOPA. Note
that the previous blue box provided the estimated cumulative impact of all changes for
the whole market.
58
As a reminder, Option 2 would have a very negative effect on insurers’ international competitiveness.
59
In particular, the protracted low yield environment could justify a decrease in the assumption of “cost-of-
capital rate” which is an input to the calculation of the risk margin, as also requested by the insurance
industry. This parameter is currently set at 6% but has not been revised since 2014. The low-yield
environment makes it reasonable to decrease this factor down to 5%. In view of the limited evidence, a
further decrease would however not be justified, and has therefore been discarded. Similarly, EIOPA
introduces a new “lambda factor” in the calculation of the risk margin which aims at reducing the size of
this item for long-term business. However, EIOPA introduces a cap to the extent of the reduction (50%
maximum). However, EIOPA does not provide concrete justification for this cap, which is penalizing long-
term businesses. Therefore, the Commission services recommend not introducing such a cap..
Page | 41
Driver
Impact assessment of Option 2 and Option 3 (in EUR billion)
Negative figures mean that insurers’ capital resources deteriorate
Fourth quarter of 2019 Second quarter of 2020
Option 2 Option 3 Difference Option 2 Option 3 Difference
Changes on
interest rates
-55 -48 7 -81 -73 8
Volatility
adjustment
16 28 12 13 45 29
Risk margin 16 28 12 18 30 12
Other 8 8 -/- 10 10 -/-
Total - 15 + 16 + 31 - 40 + 8 + 48
Based on those figures, we can note that on average, there would be no immediate need
for capital increases by insurers. While the quantitative impact would remain contained,
Option 3 would lead to a material improvement compared to the baseline, by allowing for
a better risk attribution (i.e. by laying more emphasis on interest rate risk, like in Option
2). The “compensating measures”, which are further explained in Section 3 of Annex 8,
are not materially affecting risk sensitivity or financial stability, as they can be
technically justified to a certain extent and imply removing layers of prudence in other
areas of the current framework, which may be deemed excessive. The Commission
services have not considered changes, which would not be justified by any quantitative
evidence, as this would go against the primary objective of improving risk sensitivity. In
conclusion, the difference with Option 2 in terms of improved risk sensitivity and
financial stability is deemed limited in the long run (once the full impact of the changes
are implemented).
Costs
Like Option 2, Option 3 would make the framework more complex for all insurers.
However, as the volatility adjustment would be simplified in comparison with Option 2,
Option 3 would have a less negative impact than Option 2. The “compensating”
measures introduced in Option 3 may also slightly increase implementation costs
compared to Option 2, although the difference is expected to be minimal. Indeed, the
approach during the transitional period would be similar to the one during the permanent
regime (e.g. instead of taking the full impact of the negative interest rates in the first year,
insurers would only take one fifth of that impact; the next year insurers would take two
fifths, and so on). Finally, the phasing-in period implies updating information system
every year until the fully-fledged changes are made. Therefore Option 3 would generate
moderate implementation costs.
Like Option 2, Option 3 would have limited (but possibly negative) impact in
improving the consistency of supervision, due to the increased complexity of the
changes introduced and the need to maintain consistency as regards the timing of the
gradual adjustments. As Option 3 would also streamline some of the technical
adjustments (which are deemed too burdensome while bringing limited added value from
a technical standpoint60
), it would be slightly less complex than Option 2, and the risk of
diverging supervisory practices would be slightly lower.
Finally, as explained above, Option 3 postpones to the medium term the appropriate
improvement on risk sensitivity and financial stability as the amendments with a negative
60
See Section 2 of Annex 8 to have further details on the streamlining of the volatility adjustment.
Page | 42
impact would only be gradually implemented. Therefore, in the short term, the ability of
Option 3 to address the problem of insufficient risk sensitivity is limited. In addition, the
moderate but negative effect of Option 3 on long-term solvency ratios is more than offset
by the benefits in terms of reduced volatility. Therefore, overall, Option 3 does not have
a negative effect on long-term financing and on international competitiveness.
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would be effective in improving the
risk sensitivity and in mitigating the volatility of the framework. It would be also more
efficient than Option 2, by avoiding significantly negative impact on insurers’
competitiveness and on financial stability, and by smoothing any remaining negative
impact over time. While policyholder protection would be slightly lower than in Option
2, it would be much improved compared to the baseline. In addition, the identified
adaptations compared to Option 2 would still have a technical basis as modifications that
could not be backed by any quantitative evidence have been discarded. As such, Option 3
is broadly coherent with the primary objectives of Solvency II (policyholder protection
and financial stability) and would not hinder – and actually would even contribute to –
other policy objectives such as facilitating the long-term and sustainable financing of the
European economy.
Winners and losers: Policyholder protection would be improved. While the level of
policyholder protection would be slightly lower than in Option 2, Option 3 would largely
preserve insurers’ ability to supply insurance products with guarantees that meet
consumer demands. Therefore, the benefits for consumers has to be weighed against the
slight reduction in policyholder protection compared to Option 2. Insurers would benefit
from with mitigated volatility and greater ability to make long-term decisions, despite the
tighter rules on interest rates (which are however largely counterbalanced by other
adaptations). Still, they would have to cope with a more complex framework. The
potential moderate increase in overall requirements may also reduce insurers’ ability to
make dividend distributions, although insurers’ solvency ratios would remain on average
above 200% under Option 3. Finally, the supervision of compliance with regulatory
requirements would be more complex than under current rules, also taking into account
that during the “transitional phase” the actual risks may still not be fully measures in
quantitative rules with limited ability to intervene in case of concern.
Stakeholder views: As already explained when discussing Option 2, a majority of
stakeholders would support an approach aiming to mitigate volatility and to improve risk
sensitivity, while avoiding material increases in capital requirements. Therefore, among
the three options, Option 3 would probably receive greatest support from stakeholders.
Note that insurers would call for more radical changes to the framework to reduce the
level of capital requirements and improve their competitiveness. However, this would go
against the primary objective of policyholder protection, and such changes would not be
justified. Supervisory authorities would have to cope with a more robust but more
complex framework, and they would have less assurance than in Option 2 that the
framework is achieving an appropriate level of policyholder protection. Still, most
supervisors support the principle of a “phasing-in” although they would not support a too
long transitional period. The “accommodating measures” (compared to Option 2) are
consistent with various stakeholders’ requests (insurance industry, several public
authorities, etc.), although they have not been put forward by EIOPA in its final opinion.
Page | 43
6.2.3. Choice of the preferred option
The below tables provides a high-level summary of how the previously described options
compare (note that for the sake of readability of the tables, the labels of the Options have
been shortened).
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financial
stability
Option 1 –Do nothing 0 0 0 0 0 0 0 0
Option 2 – Fix all technical
flaws
-- +++ +++ - - +++ --- ---
Option 3 – Address issues of
risk sensitivity/volatility
while balancing the
cumulative effect
+++ ++ +++ - - ++ ++ ++
Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 -- +++ +/-
Option 3 + ++ -
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Option 2 would be the most effective in addressing issues related to insufficient risk
sensitivity and excessive volatility. The benefits in terms of policyholder protection and
financial stability would however be compensated by the highly negative impact on
insurers’ competitiveness and ability to provide long-term sustainable financing to the
economy. Therefore, there is a trade-off to be made between Option 2 that achieves
policyholder protection and Option 3, which, while being less effective in policyholder
protection than Option 2, would not materially harm any other specific objective. In view
of the high political priority of the review to facilitate insurers’ contributions to the
completion of the CMU and the European Green Deal, Option 3 is deemed more
appropriate in achieving the right balance between technical robustness, policyholder
protection, and the preservation of insurers’ ability to finance the economic recovery.
The preferred option to address Problem 2 is Option 3 (Address issues of risk
sensitivity and volatility while balancing the cumulative effect of the changes)61.
6.3. Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs for small and less complex
insurers
6.3.1. Option 2: Exclude a significant number of firms from Solvency II and
enhance the proportionality principle within Solvency II
This option follows EIOPA’s advice, which proposes a significant increase in the size
thresholds below which insurers are excluded from the scope of mandatory application of
61
Please refer to Sections 2 and 3 of Annex 8 for further details on the approach to reducing volatility and
to ensuring a “balanced” approach to the review in terms of capital requirements.
Page | 44
Solvency II. Therefore, a number of insurers currently in the scope of the European
framework would no longer be subject to this regime, but instead to national-specific
regimes. More precisely, Option 2 would imply:
 doubling the threshold on insurers’ liabilities towards policyholders: from € 25
million to € 50 million;
 leaving the discretion for Member States to set the threshold on gross written
premiums between € 5 million (current threshold) and € 25 million62.
The rationale behind EIOPA’s approach is to consider that insurers’ liabilities towards
policyholders are a first line of defense of policyholder protection. Therefore, a change in
the threshold in this area needs to be carefully considered. On the contrary, EIOPA is of
the view that there is less risk in granting more flexibility to Member States in relation to
business revenues (gross-written premiums) which is not a measurement of risk
exposure.
Furthermore, EOPA advises to set up a preferential treatment, in terms of proportionality,
for firms complying with a list of criteria defined in the framework. Based on seven
criteria63
(only one of them related to size), “low-risk profile” insurers would benefit
from automatic application of several Solvency II proportionality measures, which would
be clearly specified in the legislation. Additional simplifications would also apply to
certain types of insurers, notably insurance captives (i.e. insurance companies established
by an industrial or commercial group to provide coverage for itself).
Finally, Option 2 would mandate EIOPA to publish an annual report on the application
of the proportionality principle across the EU.
Benefits
By reducing the mandatory scope of application of Solvency II, Option 2 would result in
a material reduction in compliance and capital costs for insurers that are newly excluded,
as it is expected that national rules are less stringent in terms of reporting rules64
. Based
on EIOPA’s impact assessment, 228 out of 2525 EEA insurance companies (i.e. 9% of
all insurers that are currently in the scope of Solvency II) would be excluded from the
scope of the European framework under Option 2. It should be noted that as the threshold
related to revenues is subject to national discretion up to € 25 million, Member States,
would be able to retain a lower limit (or even apply Solvency II to all insurers, as it is
currently the case in thirteen Member States). Assuming that Member States that
currently apply Solvency II to all insurers do not change their approach, only up to 180
companies (i.e. 7% of all EEA insurers that are currently subject to Solvency II) would
actually be excluded in accordance with Option 2. The wider discretion given to Member
States in relation to the scope of Solvency II allows taking into account national
specificities, notably the relative size of each national market.
EIOPA’s impact assessment also suggests that the criteria to define “low-risk profile”
insurers would allow capturing 407 companies, which represent 16% of EEA insurers
(0.5% of the life market share in terms of insurers’ liabilities and 1.8% of the non-life
62
Member States have full flexibility regarding the supervisory regime applicable to insurers below the
thresholds set out in the Solvency II Directive. Therefore, they can apply Solvency II at national level
beyond the minimum scope defined by the Directive. As a result, the discretion proposed by EIOPA in
relation to the gross-written premium threshold would also concern insurers with gross written premiums
of less than € 5 million. In practice, EIOPA’s recommendation is equivalent to simply setting the gross
written premium threshold to the highest boundary of € 25 million (multiplication by 5 of this threshold).
63
See page 48 and 49 of EIOPA’s Opinion on the 2020 Review of Solvency II.
64
For instance, seven Member States apply Solvency II principles but with some exemptions, another six
Member States apply Solvency I, and five a regime, which is different from Solvency II and Solvency I.
Page | 45
market share in terms of gross written premiums). However, those estimates do not take
into account the reduction in the number of firms subject to Solvency II due to the
increase in the thresholds of exclusions from the scope of mandatory application of the
Directive. Assuming that the 228 firms that would be excluded from Solvency II would
also be low-risk profile, the minimum number of insurers, which would meet the criteria
to be considered as “low-risk profile” would be 179 (instead of 407), representing 7% of
current total Solvency II insurers.
For those insurers that are deemed “low-risk profile”, the regulatory burden would be
lower, notably, in terms of governance and reporting requirements (lower frequency of
submission of the ORSA report – two years instead of one –, frequency of submission of
regular supervisory report by default set at three years). In addition, given the difficulties
to capture all features of “low-risk profile” insurers through seven criteria only, EIOPA
proposes that other insurers, not compliant with those criteria, could still be granted
identical benefits in terms of proportionality when they get an ad-hoc authorisation from
their NSAs. Finally, EIOPA proposes to introduce some further simplifications in
relation to quantitative requirements, notably the possibility to reduce the frequency of
calculation of capital requirements in relation to risks that are deemed immaterial.
Therefore the implementation of Option 2 would certainly increase the proportionality
of prudential rules in order to remove unnecessary and unjustified administrative
burden and compliance costs, notably for low-risk profile insurers and those other
companies whose nature, scale and complexity of the undertaken risks are deemed
limited.
The enhancement of the proportionality principle and the associated reduction of undue
administrative and compliance costs would improve EU insurers’ competitiveness.
Indeed, proportionality would not only depend on size but on the nature, scale and
complexity of the risks of each insurer. Therefore, even larger insurers, which conduct
international business may benefit from some proportionality measures and from the
associated reduction in compliance costs.
Specific proportionality measures in relation to captive insurers would also be
introduced. Captive insurance is an alternative to self-insurance in which a corporate
group establishes an insurance company to provide coverage for itself. The main purpose
of establishing a captive insurer is to avoid relying on traditional commercial insurance
companies, which may have volatile pricing and may not meet the specific needs of the
corporate group. By creating its own insurance company, the corporate group can reduce
its risk management costs, insure difficult risks, have direct access
to reinsurance markets, and increase cash flows. Implementing more proportionate rules
in relation to captive insurance would facilitate – and therefore incentivise – businesses
to establish such firms. This might allow a more efficient risk management by industrial
and commercial groups, and improve the resilience of economic activities against
systemic events, which may not always be appropriately covered by private insurers'
product offering (for instance, captives may be used as a risk management tool against
pandemic events if private insurers’ supply against such events proves to be insufficient).
It is not possible to have a clear assessment as to whether Option 2 would have a positive
impact on the long-term financing and the greening of the European economy. The
conclusion actually depends on the national framework to which insurers excluded from
Solvency II would be subject. If the national framework is close to the former Solvency I
regime, then it is expected that insurers are not subject to capital requirements on their
investments, and would therefore have less constraints when taking investment risks.
However, national frameworks may also include limits on investments in certain asset
Page | 46
classes, which could then have a negative effect on insurers’ ability to invest in the real
economy. As for those insurers, which would remain in the scope of Solvency II, the
reduced compliance costs would improve the long-term profitability and capital
resources. Higher levels of own funds may facilitate more risk taking (and therefore more
ability to invest in riskier asset classes, such as equities).
Costs
Insurers that would be newly excluded from Solvency II would possibly face material
one-off costs due to the need to change all reporting and IT systems. In any case, insurers
may always choose to continue being subject to Solvency II, so switching costs could
always be avoided. This may also imply sunk costs as those small companies, which
would be newly excluded from the framework have probably incurred significant costs to
comply with Solvency II requirements. However, as explained above, in the longer run,
they would probably face lower ongoing compliance costs. Insurers that are not in the
scope of mandatory application of Solvency II (i.e. those below the exclusion thresholds)
may still request licensing under Solvency II, which is needed in order to operate cross-
border. For those insurers, the extension of thresholds would have no direct financial or
economic impact.
Nevertheless, a negative indirect impact on the competitiveness of the small and medium
sized insurers that continue under the Solvency II scope cannot be ruled out. The
considerable extension in revenues thresholds would make it more likely that insurers
may have to compete in another Member State with other European companies of larger
size but which are excluded from the application of Solvency II. For example, let us
assume that a country A sets the exclusion threshold at € 25 million whereas country B
keeps it at the current € 5 million. An insurer of country B with € 6 million gross written
premiums would be subject to Solvency II, and if it is operating in country A, would
have to compete with local insurers that may be up to four times as big as itself but which
would still not face the compliance costs of Solvency II. This disadvantage, in terms of
competitiveness, for the cross border insurers in country A may became a barrier to the
entrance of other European providers to the Member State with higher thresholds in
revenues, leading to unintended effects in the global competitiveness of the insurance
sector.
For those insurers, which remain in the scope of Solvency II but are eligible to be
recognized as low-risk profile, there would be some one-off implementation costs
related to the submission of the application to benefit from the automatic proportionality
measures65
. The likely high number of applications would generate significant
implementation costs for public authorities in the short term, as they would have to
assess the validity of all applications.
However, the numerous companies that would be excluded from Solvency II (up to 9%
of all insurers currently in the scope of Solvency II) would no longer submit data to
EIOPA. Therefore, the latter would have less possibilities to monitor on a sector-wide
basis the trends and potential build-up of systemic risk in the insurance sector. Hence,
Option 2 may slightly deteriorate the ability of the framework to prevent systemic risk,
which would more heavily depend on the quality of national supervision and the
robustness of the national prudential regimes.
65
The cost of the application would however be probably significantly lower than the long-term gain in
terms of reduced regulatory burden. However, should such costs prove to outweigh the benefits, an insurer
has no obligation to submit an application (in which case it would still fully apply Solvency II.
Page | 47
Finally, Option 2 would have a negative impact on the level of policyholder
protection, in terms of both quantitative requirements and transparency. National
quantitative rules are expected to be less stringent than EU ones, and this implies a higher
risk of insurance failures. Similarly, public disclosure under national rules may be less
strict than under Solvency II, and policyholders of insurers which would be newly
excluded from Solvency II would no longer benefit from the high quality and granularity
of information contained in the annual reports by insurers on their solvency and financial
condition (SFCR). The extension of the scope of insurers, which would be subject to the
patchwork of national regimes would result in an overall decrease in risk sensitivity
(for instance, Solvency I which is applied in six Member States to insurers excluded from
Solvency II is not a risk-based framework). It would also automatically have a negative
effect on the consistency and coordination of insurance supervision across the EU.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would result in a clear reduction of
compliance costs for insurers and would achieve a significant simplification of the
framework. The Commission services have requested some industry stakeholders to
assess the extent of the reduction of compliance costs stemming from EIOPA’s advice.
Due to the time constraints, stakeholders could only provide partial information. Thus,
some of the proportionality measures envisaged in Option 2 (namely the reduced
frequency of the ORSA report, the reduced frequency of mandatory review of internal
written policies and the possibility for the same person to cumulate several “key
functions” in a firm) could allow saving up to one FTE66
.
The annual report to be published by EIOPA on proportionality would foster
transparency on the state of play and would enhance peer pressure so that all public
authorities would have to effectively implement the proportionality principle. Therefore,
Option 2, would materially reduce the administrative burden and the cost of compliance
for the vast majority of small and medium companies in scope of the European
framework, improving the efficiency of many insurers and therefore, contributing to
preserving the competitiveness of the European insurance industry. However, due to a
very significant increase in exclusion thresholds, Option 2 would largely achieve
proportionality by reducing the scope of the European framework, with potential
negative impact on the level-playing field in the European market. Option 2 would also
be coherent with the Better Regulation agenda to reduce undue administrative costs.
Winners and losers: The insurance sector would take advantage from clearer rules on the
application of the principle of proportionality, as it would not only apply to the smallest
insurers, but also to those that are larger but have a low-risk profile (because they either
meet the criteria or are granted ad hoc approval by their supervisory authority). Notably,
small and less risky companies would face lower administrative burden either because
they are excluded from the scope of the Directive or because they are deemed “low-risk
profile” insurers. Losers would be the policyholders of those insurers that are no longer
subject to Solvency II, as the level of protection could be lower and consumers would
probably benefit from less transparency. Supervisory authorities would also be losers to a
certain extent, as they would no longer have the wide margin of discretion that they
currently have in applying the rules. The new proportionality measures would also imply
for them less information submitted through narrative reporting. In addition, the wider
scope of insurers subject to national regimes would imply that supervisors would face
more difficulties in comparing financial data based on two different sets of risk metrics
66
Source: AMICE. Of course, the actual figure depends on the size of the company and the proportionality
measures it is applying currently.
Page | 48
(due to the coexistence of a European and a national regime). At European level, EIOPA
would also see a reduction of the data collected and in the numbers of firms under its
remit. Also, there would be a certain fragmentation of the Single Market for insurance
firms.
Stakeholder views: As part of EIOPA’s consultation activities, insurance stakeholders
largely welcomed the proposed extension of the exclusion thresholds as envisaged in
Option 2, although some national insurance associations expressed concerns for the
level-playing field. In relation to proportionality within Solvency II, stakeholders were of
the view that EIOPA’s proposal fell short of expectation, notably in relation to reporting
and disclosure.
6.3.2. Option 3: Give priority to enhancing the proportionality principle within
to Solvency II and make a smaller change to the exclusion thresholds
Option 3 would follow a similar approach as Option 2, but with the following differences
(deviations from EIOPA’s advice):
- In relation to the scope of Solvency II, the increase in exclusion thresholds related
to gross written premiums would be lower (multiplication by three instead of
five)
- In relation to proportionality within Solvency II, the eligibility criteria to be
classified as low-risk profile insurer would be slightly streamlined compared to
Option 267
, and those insurers would benefit from additional proportionality
measures in relation to public disclosure. Notably, a full SFCR would only be
required every other three years, whereas only a simplified report with limited
“narrative” parts would have to be published on a yearly basis. The
proportionality measures of Option 2, including in relation to supervisory
reporting, would also be granted to low-risk profile insurers.
Therefore, under Option 3, Solvency II would remain applicable to more firms than in
Option 2, and a larger number of Solvency II firms would also be presumably classified
as low-risk profile insurers. Those low-risk insurers would benefit from the automatic
application of all Solvency II proportionality measures, which would be further expanded
compared to Option 2.
Benefits
According to EIOPA’s impact assessment, Option 3 would result in the exclusion from
scope of Solvency II of up to 186 companies out of 2525 entities (7 % of insurers that
are currently applying Solvency II). Assuming that Member States, which currently apply
Solvency II to all insurers do not change their approach, only up to 142 companies (i.e.
6% of all EEA insurers that are currently subject to Solvency II) would actually be
excluded in accordance with Option 3.
Consequently, a larger number of firms than in Option 2 would remain in the scope of
Solvency II. This also implies that more insurers than in Option 2 could take advantage
of the proportionality measures identified by EIOPA, provided that they comply with the
criteria to be classified as low-risk profile. Based on EIOPA’s impact assessment, the
reduced list of criteria compared to Option 2 would imply that approximately 435
insurers (i.e. 17% of the European market) would be eligible to automatic proportionality
67
For the purpose of this impact assessment, one criterion would be dropped, in relation to the comparison
of investment returns with average guaranteed rates for life business. The reason for dropping this
threshold is the difficulty to actually have a meaningful and comparable approach to measure such rates.
Page | 49
under Option 368
. However, EIOPA’s figures do not take into account a potential change
in the exclusion thresholds. Assuming that the 186 firms that would be excluded from
Solvency II would also be low-risk profile, the minimum number of insurers, which
would meet the criteria to be considered as “low-risk profile” would be 249 (instead of
435), representing 10% of current total Solvency II insurers.
Therefore, Option 3 would increase proportionality and remove unnecessary and
unjustified administrative burden and compliance costs, in a different manner than in
Option 2. Indeed, the number of firms that are excluded from the scope of Solvency II
under Option 3 is slightly lower than under Option 2. Nevertheless, the scope of insurers
that would be eligible to automatic proportionality would be larger, as well as the number
of proportionality measures (indeed, additional proportionality measures in relation to
supervisory disclosure would be granted under Option 3). Option 3 would therefore
further reduce compliance costs of those insurers, which remain in the scope of Solvency
II than Option 2. Note also that insurers can always decide remaining in the scope of
Solvency II even if they are not in the scope of mandatory application of the Directive.
For this reason, if a national framework proves to be more burdensome than Solvency II,
insurers would still have the possibility to continue applying Solvency II.
By further enhancing the proportionality principle and the associated reduction of undue
administrative and compliance costs for insurers in the scope of Solvency II, Option 3
would be more effective in improving EU insurers’ competitiveness than Option 2.
Finally, like under Option 2, proportionality measures in relation to captive insurers
could incentivise businesses to establish such firms. This may allow a more efficient risk
management by industrial and commercial groups, and improve the resilience of
economic activities against systemic events which may not always be appropriately
covered by private insurers' product offering (for instance, captives may be used as a risk
management tool against pandemic events if private insurers’ supply against such events
proves to be insufficient).
For the same reasons as in Option 2, it is not possible to assess the impact of this Option
on insurers’ ability to provide long-term and green financing of the economy.
Costs
By slightly reducing the number of insurers that would be newly excluded from Solvency
II (compared to Option 2), Option 3 would have a less negative effect on the
consistency of insurance supervision and level-playing field than Option 2. Option 3
would indeed ensure that only policyholders of smallest and less risky insurers would be
left without the minimum layers of protection of the European framework. Since the size
thresholds would be subject to a lower increase than under Option 2, situations where an
insurer operating cross-border (and therefore subject to Solvency II) would have to
compete on a national market with a larger insurer that is not in the scope of Solvency II
would concern less firms. Therefore fair competition within the EU would be better
preserved than under Option 2.
Likewise, as more insurers would continue applying Solvency II, Option 3 would be
more prudent than Option 2. Therefore, it would raise less financial stability risks, as the
share of insurers that would no longer be in the scope of the European monitoring by
EIOPA would only represent up to 7.5% only of the European market (i.e. 0.07% of
gross written premiums and 0.06% of insurers’ liabilities towards policyholders),
according to EIOPA’s impact assessment.
68
Calculations derived from EIOPA’s background document on the Impact Assessment.
Page | 50
Finally, implementation costs would be similar to Option 2, although sunk costs and
one-off costs of transitioning from Solvency II to national regimes would be lower under
Option 3 (as less firms would be excluded from the mandatory scope of Solvency II). For
those insurers which would have been excluded from Solvency II under Option 2 but
remain in its scope under Option 3, compliance costs would be higher. Finally, insurers
benefiting from automatic proportionality would be higher than in Option 2 and the
additional proportionality measure of lower frequency of publication of “full” SFCR
would make compliance costs lower than in Option 2.
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would be more effective in enhancing
proportionality and improving EU insurers’ competitiveness, while the impact of
excluding some firms from Solvency II on policyholder protection and on financial
stability would be lower than under Option 2. Option 3 would also reduce the risk of
uneven level-playing field (as the extent of Member States’ discretion to apply or not
apply Solvency II at national level to insurers that are below the exclusion thresholds
would be lower in Option 3 than under Option 269
). For those reasons, Option 3 is a more
efficient approach than Option 2 to enhance proportionality with limited side effects on
other objectives. Option 3 would be more coherent with the Better Regulation agenda
than Option 2, as it would further expand proportionality measures and eligible entities
than what EIOPA proposed, notably in relation to disclosure, which is an area where
insurers expect alleviations of regulatory burden.
Winners and losers: Policyholders would be less losers than in Option 2, as a larger
number of them would still benefit from the high level of protection provided by
Solvency II. Lower compliance costs for insurers in the scope of Solvency II would also
imply higher ability for insurers to innovate and supply policyholders with a well-
diversified range of insurance products. The reduced disclosure would not necessarily
affect policyholders, as the “light” version of the SFCR, which would be published when
the full report is not required would still include targeted information towards consumers.
However, other specialised stakeholders (financial markets participants, analysts, etc.)
would not have the same level of information as in Option 2 for low-risk insurers that are
in the scope of solvency II. The impact of insurers is more mixed. For those insurers that
would be excluded from Solvency II under Option 2 but would remain in the scope under
Option 3, the regulatory burden would be higher and those insurers could be seen as
losers. However, under Option 3, more insurers in the scope of Solvency II would be
classified as low-risk profile and all low-risk profile insurers would benefit from more
proportionality measures, and as such, they gain. Supervisors would also be slightly more
losers than in Option 2 as the information disclosed on a yearly basis would be reduced
when the “full” SFCR is not required.
Stakeholder views: As part of the qualitative comments received during the
Commission’s public consultation, many stakeholders highlighted the need to adopt
proportionality measures in relation to reporting and disclosure. The lower frequency of
the SFCR was mentioned by several insurance associations. Similarly, many respondents
also called for a less strict list of criteria70
to be classified as low-risk profile. Option 3,
which fine-tunes EIOPA’s criteria, would therefore partly address their requests. As
69
Exclusion threshold on gross written premiums would indeed be set at EUR 15 million under Option 3,
but at EUR 25 million under Option 2.
70
Some criteria were deemed too restrictive (size, non-traditional investments) or unjustified (cross border
business) by stakeholders. Any relaxation of these criteria would naturally lead to that more insurers could
comply with the conditions to be considered as low-risk profile insurers.
Page | 51
regards the scope of application of Solvency II, mutual insurers and mutual insurance
associations called for an increase in thresholds that goes beyond what EIOPA envisaged
(i.e. raising the threshold of gross written premiums to € 50 billion). For those insurers,
Option 3 would therefore not meet their expectations, although most mutual insurers
would probably meet the shorter list of classification criteria for low-risk profile insurers
included in this option and would therefore benefit from automatic proportionality.
6.3.3. Choice of the preferred option
The below tables provides a high-level summary of how the previously described options
compare (note that for the sake of readability of the tables, the labels of the Options have
been shortened).
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financial
stability
Option 1 – Do nothing 0 0 0 0 0 0 0 0
Option 2 – Exclude a
significant number of firms
& enhance proportionality
0 - 0 ++ -- -- + +
Option 3 – Give priority to
enhancing proportionality
within Solvency II
0 - 0 +++ - - ++ +
Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 +++ -- --
Option 3 ++ - -
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Firms that would be newly
excluded from Solvency II
Firms that would remain in Solvency
II but would be classified as low-risk
profile
Total number of firms
benefiting from a change to
the framework
Maximum
number
Share of current
total Solvency II
insurers
Minimum
Number
Share of current total
Solvency II insurers
Expected
Number
Share of current
total Solvency
II insurers
Option 1 / / / / / /
Option 2 228 9% 179 7% 407 16%
Option 3 186 7% 249 10% 435 17%
Option 2 would be the most effective in achieving proportionality by simply waiving the
mandatory application of Solvency II to the largest number of firms from the European
framework. However, this would be to the detriment of policyholders (whose level of
protection could be lower if national frameworks are not risk based or rely on a lower
level of prudence than Solvency II). It would also affect supervisors (which would lose
supervisory discretion compared to current rules, and would face a reduction in the
number of data received from insurers due to the lower frequencies of reporting for low-
risk profile insurers). Option 2 would also have a negative impact on other specific
objectives. Option 3, while being less effective than option 2 (although it enhances
proportionality within Solvency II), would be more cost efficient as the negative side
Page | 52
effects on other stakeholders or other specific objectives (consistency of supervision,
level-playing field and financial stability) would be lower than under Option 2. In
addition, one can note that in total, Option 3 would allow covering a larger number of
firms in the scope of proportionality (either via an exclusion from the mandatory scope of
application of Solvency II or the application of automatic proportionality within
Solvency II).
Option 3 would therefore be the most efficient Option, considering the large
acknowledgement among all types of stakeholders that there is a need to simplify
Solvency II for smaller and less complex insurers. In other words, Option 3 would ensure
that most policyholders remain protected by the Solvency II framework while creating a
regime for low-risk profile insurers that is more fit in terms of compliance and regulatory
costs. Based on EIOPA’s inputs and the feedback from the industry, the Commission
identified a series of proportionality and simplification measures which would be part of
the implementation of Option 3. The main measures are described in Annex 4.
The preferred option to address Problem 3 is Option 3 (Give priority to enhancing
the proportionality principle within Solvency II and make a smaller change to the
exclusion thresholds.).
6.4. Deficiencies in the supervision of (cross-border) insurance companies and
groups, and inadequate protection of policyholders against insurers’ failures
The options presented in this section address problem drivers underlying the core
problem of insufficient policyholder protection, including in the case of an insurer’s
failure. They encompass different sets of measures along a continuum of supervision,
recovery, resolution and insolvency. Therefore, although they are complementary in
achieving the objective of enhanced policyholder protection, they remain different
dimensions for which each set of measures should be discussed and assessed on its own
merits. Section 6.4.4 assesses how the respective related costs and benefits interact.
6.4.1. Option 2: Improve the quality of supervision by strengthening or
clarifying rules on certain aspects, in particular in relation to cross-border
supervision
Under Option 2, the legal framework would be clarified and strengthened so as to ensure
more quality and convergence of supervision, in particular in relation to cross-border and
group supervision, in line with EIOPA’s general approach. In relation to group
supervision, Option 2 would imply: (i) strengthening and harmonising supervisory
powers including when their headquarter is in a third country or when the parent
company is a non-regulated entity71
, and (ii) clarifying prudential rules on capital
requirements and risk management which are subject to diverging interpretations by
Member States72
. In relation to cross-border supervision, more requirements concerning
71
Proposal includes better framing of cases where a national authority may completely waive group
supervision (under the control of EIOPA), clarifying powers over unregulated parent companies of a group,
power to restructure the group where the corporate structure is such that it prevents effective supervision,
strengthened supervision of groups whose parent company is outside Europe to avoid incentivising groups
to circumvent Solvency II requirements by establishing their head office outside Europe.
72
This includes clarifications on the way to account for equivalent third-country insurers in the group
solvency calculation (currently, a legal gap allows to not take account of currency risk), to account for
small subsidiaries (proportionality), to integrate non-insurance financial institutions and on rules governing
capital transferability within a group.
Page | 53
cooperation between the Home and Host supervisory authorities would be introduced,
and EIOPA’s coordination role would be strengthened.
Benefits
Option 2 would have a positive effect on the quality of cross-border supervision and
the convergence of supervisory practices of insurance groups as it would remove
existing gaps and uncertainties. Therefore, it would improve the level-playing field
within the Union and increase legal certainty for insurance businesses. By ensuring a
stronger focus on cross-border supervision and cooperation between national authorities,
Option 2 would also improve the ability of supervisors to protect policyholders and
beneficiaries. Option 2 also ensures stronger coordination by EIOPA which would be
empowered to settle a disagreement between authorities on complex cross-border cases.
This would ensure higher consistency of supervision and contribute to a more
harmonised level of policyholder protection. For those reasons, Option 2 is expected to
improve the functioning, and therefore the trust in the internal market.
In addition, Option 2 would reduce the risk of regulatory arbitrage, in particular the
opportunities to circumvent European prudential rules. Indeed, group supervision would
apply in a consistent manner regardless of the group structure, the type of parent
company or the location of the head office. In particular, Option 2 would imply stricter
rules governing the supervision of groups headquartered outside Europe, including better
monitoring of third-country risk exposures for European entities, and more focus on
capital and financial outflows from the European companies to the wider international
part of the group. Such an approach would ensure that the European subgroup remains
sufficiently capitalised and that policyholders are better protected. Therefore, Option 2
would reduce incentives for a European group to move its head office outside Europe,
and would strengthen the level-playing field between EU and non-EU insurance
groups. As regards cross-border supervision, enhanced information exchange would help
national authorities protect policyholders against forum shopping73
by those applicants
who have been rejected elsewhere.
Option 2 would contribute to improving risk sensitivity and policyholder protection,
as it would lead to a clearer and more robust regulatory framework in terms of how to
assess the transferability of capital within an insurance group, including for entities from
different financial sectors (e.g. banks) or countries (e.g. subsidiaries from third countries)
should contribute to group risks.
Option 2 also includes elements of proportionality: for instance, insurance groups for
which the consolidation of small and less complex insurance entities would generate
undue compliance costs would be allowed to use simplified rules. Similarly, the
strengthened information exchange requirements between supervisory authorities would
be subject to proportionality considerations, with the aim to limit unnecessary
administrative burdens and compliance costs. Therefore, Option 2 would contribute to
proportionality, although some of the new rules may make the framework more complex
(although clearer) than under current rules.
Option 2 would contribute to preventing systemic risks by ensuring that insurance
groups take into account both financial and non-financial exposures to all types of
companies within the group, including those belonging to other financial sectors and
non-regulated companies. Therefore, any spillover effect stemming from the interaction
73
Forum shopping makes reference to the practice of choosing for licensing authority which is likely to
provide the most favourable outcome.
Page | 54
between insurance and non-insurance entities would be closely monitored. In addition,
the enhanced risk sensitivity and the more efficient capital allocation within insurance
groups would reduce the likelihood that insurers take excessive risk, and would therefore
decrease the risk of build-up of systemic risk.
Finally, the further integration of the Single Market for insurance services stemming
from this option can indirectly stimulate the cross-border supply of innovative insurance
solutions, including those covering risks related to natural catastrophe, climate change.
Therefore, Option 2 can have an indirect positive effect on insurers’ contribution to a
more sustainable and resilient European economy. By improving rules on group
supervision Option 2 would also indirectly incentivise insurance groups to optimise their
capital allocation and diversify their risks across the different entities of the group, which
can also have positive impacts on the ability to provide funding in long term and
sustainable assets across Europe.
Costs
Option 2 would have a slightly negative effect on insurance groups’ competitiveness
at international level, as it would generate overall a limited increase in quantitative
requirements, as explained in EIOPA’s impact assessment. In addition, although it is
expected that this impact may be concentrated on a few active international groups with
complex structures, material activities outside Europe, and possibly other financial
activities (e.g. banking). For those groups, Option 2 would lead to a slight deterioration
in their international competitiveness as the lower level of “free excess capital” or the
higher capital requirements stemming from third-country subsidiaries could be seen as
reducing their ability to expand internationally. On the other hand, as explained above,
the strengthening of the supervision of third-country groups stemming from Option 3
would imply that non-EU groups do not have a competitive advantage over EU ones
when establishing a European subsidiary.
In order to assess the significance of implementation costs, EIOPA invited 83 insurance
groups from 20 EEA Member States to participate to a survey. 41% of respondents
indicated that EIOPA’s draft proposals would have significant one-off cost, and 36% that
on-going costs would remain significant. Similarly, a survey submitted to NSAs suggests
that implementation costs for supervisory authorities is expected to remain limited, as
only 7% and 21% of respondents indicated expecting significant increase in one-off or
ongoing costs depending on the amendment considered. As EIOPA amended its
proposals and simplified technical changes, which were assessed as generating the most
significant implementation costs, the actual implementation costs stemming from Option
2 is expected to be lower. As regards cross-border supervision, implementation costs are
expected to be limited for the insurance industry. Option 2 would require more
information exchange between NSAs, which may generate additional work in Member
States where insurers have significant cross-border activities. The stronger focus on
cross-border activities implies dedicating sufficient resources to it. However, in practice
this cost is expected to be limited as Option 2 would imply upgrading into European law
principles that are already part of the Decision on the collaboration between supervisory
authorities, and are therefore expected to be already agreed and applied by supervisory
authorities.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would be more effective than the
baseline on improving the quality of supervision. On cross-border supervision, Option 2
would be effective in removing any gap to cooperation and information exchange
Page | 55
between supervisory authorities, and ensure a level-playing field with the Union by
ensuring that the principles set out in EIOPA’s non-binding tools become EU law.
Option 2 increases legal certainty for supervisors, insurance companies and groups, and
is cost-effective by simply formalising into EU legislation what is supposed to be
existing best practices. European coordination by EIOPA also ensures an efficient and
consistent implementation of the rules across the Union. On group supervision, Option 2
would in contrast to the baseline be effective as the proposed changes would clarify and
strengthen the legal framework and increase the quality and convergence of supervision.
The measures taken by choosing Option 2 come with a cost, in particular to insurance
groups but also to public authorities. In general a cost benefit analysis as such is not
possible in the regulatory context as the expected benefits are not quantifiable. However,
it is important that the desired outcome cannot be achieved in a less cost intensive way,
as ultimately policyholders have to bear any increase in cost. Also any unjustified cost
would harm the international competiveness of the Union’s insurance sector. The
measures under Option 2 consider the above elements and there is no more efficient way
in achieving the desired outcome. Option 2 is also coherent with specific objectives of
this review as well as with the primary objectives of Solvency II (policyholder protection
and financial stability).
Winners and losers: The clarification of the framework and increased cooperation of
public authorities would lead to a better and more consistent level of consumer protection
across Europe. Insurance groups would face in general slightly stricter rules by clarifying
the framework and applying it equally across the Union. In particular, those groups,
which have interpreted deficiencies in the current framework in their favour, would face
a considerable increase in the level of regulation. On the contrary, insurance groups are
also winners as there are also elements in Option 2 they would be benefitting from. It is
also the general interest to have a level-playing field for insurance groups, irrespective of
whether the groups are headquartered inside or outside the EU. Similarly, more
consistent and efficient supervision of cross-border business would improve supervisory
convergence and level-playing field and would therefore deepen the integration of the
Single Market for insurance services, with positive impact on insurance business. Finally,
impact on supervisors is somehow mixed, as they would benefit from enhanced
cooperation and coordination between them, and more legal certainty in the interpretation
of prudential rules. On the other hand, their responsibilities and the resources needed for
the supervision of cross-border business would have a cost, as well as the stricter
requirements for information exchange and cooperation, under EIOPA’s coordination.
Stakeholder views: In the context of EIOPA’s consultation activities, insurance groups,
notably internationally active ones, expressed strong concerns about EIOPA’s proposals,
in particular those which would result in an increase in capital requirements. This partly
results from the possibility that due to the lack of clarity of the current framework
insurance groups and NSAs have interpreted the framework in their own way74
, and any
clarification of the rules may lead to an increase in capital requirements for some
groups75
. However, single voices acknowledge the need for harmonization and clearer
rules, in particular regarding capital requirement calculations. Furthermore,
internationally active groups, which are the most affected by the implementation of
Option 2, perceived a risk of deterioration in their international competitiveness. This
74
For instance, some NSAs may fully waive group supervision, whereas other authorities would not do so.
75
For instance, insurance groups have different approaches when quantifying risks at group level stemming
from non-regulated holding companies or from subsidiaries headquartered in so-called “equivalent third
countries”. For further explanations of the concrete technical issues, please refer to Section 4 of Annex 8.
Page | 56
concern has also been raised by a few public authorities as part of the Commission’s
public consultation.
As regards cross-border activities, as part of the Commission’s public consultation, the
majority of stakeholders (81%) who expressed a view on this topic are satisfied with the
current approach according to which cross-border activities are supervised by national
authorities under the coordination of EIOPA where appropriate. The insurance industry
generally supports enhanced information exchange between authorities and a stronger
mediation role by EIOPA. In addition, the majority of stakeholders who had a view on
cross-border supervision (58%) supported reinforcing the role of the Host supervisor
when the Home authority does not take appropriate measures to address identified
deficiencies. This concerns in particular consumers/citizens/NGOs and insurers having a
view on this issue (respectively 83% and 55% of support), as feedback were more split
among public authorities, illustrating the complex debates around the most effective
balance of powers and responsibilities between the different supervisory authorities.
Finally, some of EIOPA’s proposals are criticized by insurance stakeholders, notably the
empowerment granted to Host supervisors to directly request information from insurers
rather than asking access to them via the Home authority, which is not assessed as an
improvement of the functioning of the Single Market.
6.4.2. Option 3: Introduce minimum harmonising rules to ensure that insurance
failures can be better averted or managed in an orderly manner
Under Option 3, and in line with EIOPA’s advice, rules aiming at the prevention of
failures would be strengthened, and, a framework for the orderly resolution of insurers
would be introduced with the objective to protect policyholders, beneficiaries and
claimants, as well as to ensure the continuity of insurance functions whose disruption
could harm financial stability and/or the real economy, and to protect public funds. This
would notably encompass:
- the requirement for insurers to draft pre-emptive recovery plans describing the
possible actions that would be taken in order to remedy a potential non-
compliance with capital requirements;
- the establishment of national resolution authorities that would draft resolution
plans and would assess and, where necessary, improve the resolvability of
insurers. Resolution would be triggered when the insurer is no longer viable or
likely to be no longer viable and when a resolution is necessary in the public
interest, i.e. to achieve the resolution objectives above.
The resolution authority would be equipped with a range of resolution tools and powers
that provide an administrative alternative to insolvency. For cross-border groups, the
effective planning and coordination between national resolution authorities in case of an
insurer’s distress would be organised in resolution colleges of all relevant authorities
involved in supervision and resolution under the control of the lead resolution authority.
The costs and benefits of those elements were thoroughly assessed and consulted upon at
two occasions by EIOPA,76
. The main insights are reflected in the following analysis.
76
See sections 11.6 and 12 in EIOPA’s Impact Assessment and section 12 in the Background Document.
EIOPA’s Opinion on the review of Solvency II was preceded by an Opinion on the harmonisation of
recovery and resolution frameworks for (re)insurers across the Member States (5 July 2017) and a
Discussion Paper on Resolution Funding and National Insurance Guarantee Schemes (EIOPA, July 2018).
Page | 57
Benefits
Option 3 would further decrease the likelihood of insurance failures and, in particular,
provide a credible framework to address the distress of insurers whose failure could
negatively affect policyholders. As such, it improves the level of policyholder
protection.
A harmonised set of powers to prevent and address failures with consistent design,
implementation and enforcement features would foster cross-border cooperation and
coordination during crises and help to avoid any unnecessary economic costs stemming
from uncoordinated decision-making processes between different public authorities and
courts. Effective cross-border arrangements would also help 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 operating, are given
due consideration and are balanced appropriately during the planning phase, and when
recovery and resolution measures are taken. Hence, it would 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. A harmonised approach
would also foster the level-playing field and avoid regulatory arbitrage. Option 3 is
largely in line with international standards for systemic risk in the insurance sector. As
such, it would not affect EU insurers’ competitiveness.
Option 3 would be applied in a proportionate way. Planning requirements would
depend on a set of criteria, i.e. the size, cross-border activity, business model, risk profile,
interconnectedness and substitutability of services of insurers. In addition, simplified
obligations would be applied where the supervisory or resolution authority deems it
possible. The existence of critical functions and other functions that are material for the
financial system or the real economy should additionally be taken into account for the
decision on the need for proportionate resolution planning. Therefore, the scope of
resolution planning would be smaller than that of pre-emptive recovery planning.
Finally, Option 3 would also have a positive impact on preventing systemic risks.
Indeed, the resolution framework would allow maintaining financial stability, and
ensuring 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).77
Costs
The implementation costs related to Option 3 stem mostly from the planning and
resolvability assessment requirements. Public authorities would have to bear the costs of
establishing a resolution authority, supervising pre-emptive recovery plans, resolution
planning and cross-border coordination work. EIOPA’s impact assessment provides an
overview of the range of costs estimated by the NSAs for drafting and maintaining
resolution plans and resolvability assessments as well as for the supervision of pre-
emptive recovery plans.78
77
See ESRB, Recovery and resolution for the EU insurance sector: a macroprudential perspective, 2017.
78
It should be stressed that the aim was gathering an initial and high-level overview of where the cost
range could be. There was no detailed description of which items should be included per category in order
to allow for the application of proportionality, which explains the amplitude of the range. Furthermore, in
most cases such plans are not in place yet. When this was the case, NSAs were asked to provide an
estimation based on their experience with other plans/reports.
Page | 58
Drafting and maintaining of resolution
plans
Drafting and maintaining of
resolvability assessments
One-off costs On-going costs One-off costs On-going costs
Staff (per year) 0.2 – 5 FTE 0.08 – 4 FTE 0.08 – 3 FTE 0.03 – 2 FTE
IT costs (internal) € 2,500 – 100,000 € 250 – 29,000 € 2,500 – 100,000 € 250 – 29,000
IT costs (external) € 2,500 – 100,000 € 3000 – 20,000
€ 10,000 –
100,000
€ 3,000 – 20,000
Fees to externals (e.g.
consultants)
€ 6,000 – 100,000 € 4,000 – 100,000 € 2,000 – 100,000 € 4,000 – 100,000
Other costs79
€ 2,400
Similarly, the one-off costs estimated by NSAs for the supervision of pre-emptive
recovery plans would lie between 0.04 and 5 FTE, and the on-going costs between 0.06
and 3 FTE.
Insurers would face costs from drafting pre-emptive recovery plans but also from
resolution planning where they have to provide information to the resolution authority or
make changes to address impediments to resolvability. No assessment of additional costs
is available, but recovery plans would be integrated in the ongoing risk management of
insurers and the cost of drafting ORSA reports and contingency planning could serve as a
source of input for the drafting of the pre-emptive recovery plan. In view of the different
approaches to the financing of resolution80
, it would not be appropriate to require in the
EU framework – as is the case in banking – the financing of a resolution fund or the
building-up of liabilities that could be bailed-in for the purpose of loss absorption and
recapitalisation of failing insurers. These measures would result in inflating the balance
sheet of insurers to create a loss absorbing capacity in proportion of their technical
provisions that would entail higher costs for the industry and impose additional servicing
risks on the companies that would not be justified by materially increased benefits81
.
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would effectively address the
identified problem drivers of lack of preparedness, delayed intervention, inappropriate
toolbox and uncoordinated management of cross-border (near-) failures combined with a
home bias to address such issues. It would also provide an alternative to insolvency.
While it is important to establish clear rules on powers to foster the recovery and enable
the resolution of failing of insurers where this becomes necessary, in particular in cross-
border situations, Option 3 would remain a minimum harmonisation approach, which
takes into account proportionality elements. In particular, national insolvency procedures
would remain a possible exit from the market for a failed insurer. Option 3 would also
ensure that supervisory intervention remains judgement based and that the trigger of
recovery measures remains the breach of capital requirements. Therefore, there would be
no new additional intervention levels in Solvency II. However, it is necessary to
introduce specific conditions for entry into resolution in order to address situations where
an insurer would be systemic if it fails. This is in line with international guidance and
standards. The policyholder protection and financial stability objectives would be
coherent with the objectives of Solvency II and Option 3 would extend these objectives
to the management of failures.
79
They include cost of materials and catering/meeting costs for all recovery and resolution activities.
80
See FSB, Developing Effective Resolution Strategies and Plans for Systemically Important Insurers,
2016.
81
EIOPA considered and consulted upon these options in the Discussion Paper on Resolution Funding and
National Insurance Guarantee Schemes (EIOPA 30July 2018).
Page | 59
The establishment of a recovery and resolution framework for insurers is also a necessary
step to improve the options for recovery and resolution of financial conglomerates. So
far, only the banking part of a conglomerate is subject to the Banking Recovery and
Resolution Directive. An EU framework is also necessary to address any legal
uncertainties about the interaction with other parts of EU legislation82
that national
solutions could face.
Winners and losers: Policyholders, the society at large and public authorities would
benefit from a decreased likelihood of failure, better resolutions of crises and from
financial stability. Member State authorities would have to bear the costs of establishing
a resolution authority, resolution planning and cross-border coordination work. Insurers
would face higher costs from recovery planning but also from resolution planning where
they have to provide information to the resolution authority. On the other hand, pre-
emptive planning enhances the awareness of and preparedness for adverse situations.
This allows companies to take informed and timely remedial actions when needed. Many
insurers would also benefit from a more level-playing field in the measures taken by
authorities to restore their financial conditions or resolve them.
Stakeholder views: Feedback to the Commission’s public consultation confirmed the
results of EIOPA’s consultation that there are generally divided views on this topic. On
the one hand, the insurance industry consider that insurers and authorities are sufficiently
prepared to deal with distressed insurers (51% yes, 19% no, 30 % no answer). On the
other hand, public authorities, NGOs, consumer associations and citizens consider them
insufficiently prepared (10% yes, 60% no, 30% no answer) and welcome further
initiatives in this field. In particular, according to the insurance industry, there should be
no intervention points for NSAs as long as capital requirements have not been breached,
and run-offs and portfolio transfers are sufficient to deal with the large majority of
failures. In their view, more intrusive tools should therefore be very cautiously
considered. While the toolkit of resolution powers needs to be complete to address the
failure of large and complex insurers, it is expected that traditional tools would be indeed
the first choice of resolution authorities. Feedback to EIOPA’s consultation further
highlighted that while most stakeholders agreed that the application of the proportionality
principle is essential, some oppose the proposal that the requirement to have pre-emptive
recovery and resolution plans should capture a specific share of each national market.
Finally, some respondents to EIOPA’s consultation also expressed concerns on the
applicability of the intended framework to reinsurers for two main arguments: (a) the fact
that reinsurance is a business-to-business activity with limited policyholders’ protection
implications and (b) the nature and type of risks as well as its limited contribution to
systemic risk.
6.4.3. Option 4: Introduce minimum harmonising rules to protect policyholders
in the event of an insurer’s failure
Under Option 4, which would be in line with EIOPA’s general approach, a coherent EU
framework for IGS would be implemented in all Member States by way of a dedicated
EU Directive. It would ensure that all policyholders83
acquiring insurance policies in the
EU would benefit from a harmonised minimum level of protection in the event that an
insurance company defaults. Based on minimum harmonisation, the EU framework
would introduce an obligation to establish IGS and determine a coherent set of minimum
82
For example, company law, financial collateral and settlement finality directives.
83
In this section, the term “policyholders” refers to policyholders, beneficiaries and injured third parties
which should all be eligible claimants.
Page | 60
requirements, but would provide flexibility to Member States to adapt IGS protection to
the varying characteristics of local insurance markets.
Annex 5 examines in detail the different options for technical features of the design of a
minimum harmonised EU framework for IGS, as well as the related costs and benefits.
On this basis, assuming EU action, the preferred features would be the harmonisation of
the geographic scope according to the home-country principle84
, as well as the coverage
of a minimum scope of eligible policies, encompassing life and selected non-life
insurance policies, to a harmonised minimum level by either paying compensation or
ensuring continuity of insurance policies. Mechanisms for cross-border cooperation and
coordination would also be established. In order to ensure an adequate protection of
policyholders, an IGS would need to be adequately funded (see sub-section on costs
below), taking into consideration the specificities of insurance activities and of local
markets.
Benefits
Action taken at EU level would benefit primarily policyholders by increasing their
protection in the event that insurers are unable to fulfil their commitments. This would
also foster the trust in a properly functioning Single Market for insurance and
increase consumer choice by ensuring that consumers feel comfortable in purchasing
insurance provided by insurers from other Member States, including innovative solutions
aimed at improving the resilience of our economies against systemic risks (natural
catastrophes, cyber-risks, etc.). The introduction of IGSs in all Member States would
additionally reduce the risk of recourse to public funds to protect policyholders from
losses, and could shield public funds from a potential liability of around EUR 21 billion85
on an aggregated based, based on estimations provided in Annex 5. The proposed policy
options are expected to generate two main advantages for the economy. First, they would
ensure a level-playing field that would address the existing competitive distortions
between domestic and non-domestic insurers. By contributing to the safety and well-
functioning of the internal market for insurance services, the envisaged EU action would
facilitate the provision of cross-border activities for individual insurers and groups.
Second, EU action would reduce the risk of allocating losses to policyholders and
taxpayers in a sub-optimal fashion, thereby also contributing to improved overall social
welfare. In addition, EU action based on the home-country principle would align and
enhance supervisory incentives, including in the context of cross-border activities, as the
financial consequences of a failure would have to be borne consistently by the insurers of
the Home Member State.
Costs
Introducing IGSs throughout the EU would also have a direct cost for insurers and an
indirect cost for policyholders, as insurers would pass on part of their contributions to
consumers through increased premiums. IGS can be financed either ex-ante, or ex-post
84
Where an IGS follows home-country principle, domestic policyholders would be protected by the
national IGS only if the insurer from which they bought a policy is headquartered in the same Member
State. In addition, policyholders buying a policy from a foreign insurer that operates on a cross-border
basis, would be protected by the IGS of the Member State of the foreign insurer if this IGS also follows the
home-country principle.
85
This amount corresponds to the losses estimated at EU-level that an insurance failure could generate and
that an EU framework of IGS should be able to cover based on a confidence interval of 99%, meaning that
in one loss event out of 100, the resources provisioned by the Fund will not be sufficient to cover the
incurred loss. This estimation varies according to the underlying parameters, such as the confidence
interval and the assumed probability of default of insurers, and the IGS design features.
Page | 61
(following a failure case), or through a combination of both approaches. EIOPA
suggested a combination of ex ante and ex post funding.86
In an ex-post funded scheme,
resources would remain with the contributing institutions until a failure occurs, and levies
would be paid only once losses arise and are known. However, ex-post funding may
entail payout delays and would be more exposed to moral hazard, as failed insurers
would have never contributed to the IGS. Furthermore, depending on the market
circumstances and the degree of market concentration, raising contributions following the
failure of an insurer could have a pro-cyclical effect. In a pre-funded scheme, funding is
readily available, pro-cyclicality is avoided, and the incentive structure is preserved,
contributing to market discipline. Annex 5 discusses the pros and cons of the financing
models in more details.
IGS funds can be considered as the additional premiums that policyholders pay to insure
themselves against the insolvency of their insurer. The payments made by each
policyholder can be considered roughly equivalent to the expected value of the losses
they would avoid incurring, in the event that their insurers defaulted. Depending on the
specificities of national insolvency frameworks, the possibility to use alternative funding
mechanisms and the use of certain resolution tools, actual funding needs in Member
States may be lower than those estimated by the model in Annex 5. In addition, the
financial burden could be smoothened over a sufficiently long transition period in order
to maintain the yearly impact at an acceptable level. While risk-based ex-ante
contributions create the preferred incentive structure for all types of insurance
commitments, the choice of a funding structure may also need to reflect that some
insurance products have more limited payout and maturity profiles. These considerations
may be suitable to balance adequately the interests of all stakeholders and should be
assessed globally with other elements of the Solvency II review.
As shown in Annex 5, the building up of a protection scheme in all Member States could
require around EUR 21 billion. This currently corresponds to 2.33% of annual gross
written premiums. Applying this target level over, for instance, a 10-year horizon would
translate into an annual contribution of 0.233% of gross written premiums or EUR 2.33
per yearly policy of EUR 1,000. However, this estimate does not take account of the
funds that are already available in the current national IGS that are pre-funded.87
EU action on IGSs would also affect insurers in different ways, depending on whether
they operate in Member States that already have an IGS or not and depending on the
specific market structures in place. For insurers, unlike policyholders, these contributions
– or at least the portion that would not be passed on to policyholders – constitute a
financial cost in themselves (and not an early payment), as losses hitting insurers in the
event of default only depend on capital, not on premiums paid. The financial costs for the
industry can be computed by using the Solvency II cost of capital rate of 5%88
. For an
IGS with a level of funding of 2.33% of annual premiums, this would translate into
financial (capital) costs of about 0.12% of annual premiums.
86
EIOPA suggested that IGSs should be funded on the basis of ex-ante contributions by insurers, possibly
complemented by ex-post funding arrangements in case of capital shortfalls and that further work is needed
in relation to specific situations where a pure ex-post funding model could potentially work, subject to
adequate safeguards.
87
Not all necessary information could be collected to determine the full level of current pre-funding in the
Member States.
88
See Sub-section 6.2.2 of the impact assessment and Sub-section 3.2.2 of Annex 8.
Page | 62
Overall assessment
Effectiveness, efficiency and coherence: The minimum harmonisation of a network of
IGS would address the problem drivers that lead to insufficient policyholder protection in
case of failure by closing the identified gaps and by removing potential overlaps. In the
event that insurers fail, IGSs would absorb insurers’ losses up to at least the EU
minimum coverage level. This mutualised “tail-risk” protection would achieve a high
level of security for policyholders and beneficiaries in a cost-effective manner (i.e.
considering the smoothing and mutualisation effect) by covering the potential excess
losses that would not be accounted for by existing capital requirements (or any available
excess capital). The pre-funded nature of the funding and its spreading among a larger
base (of insurers and of end-consumers) would provide the desired level of protection at
a lower cost and in a counter-cyclical manner. However, insurance failures remain rare
events. Therefore, the potential costs and challenges (see the sub-section on “winners and
losers” below) of EU minimum harmonisation have to be assessed bearing in mind the
level of protection that is sought throughout the Single Market and the level of risk
tolerance that policyholders and/or taxpayers may accept (as they have to ultimately bear
the losses of insurance failures). In contrast to normal court-based insolvency
proceedings, IGSs would help ensure a swift pay-out to policyholders, minimise potential
social hardship and possibly bring to zero the loss incurred by policyholders at the time
of failure, and, introduce an element of predictability and certainty on the effects of the
failure of an insurance company for its policyholders. By optimising these elements
together with a better allocation of insurance failure losses, an EU minimum
harmonisation framework for IGS would contribute to maximising EU social welfare,
developing a more competitive EU market and achieving consumers’ trust in the internal
market for insurance. The design of IGS features, in particular an ex-ante risk-based
contribution mechanism, could address and manage potential moral hazard effects that
could be linked to the introduction of a framework of protection schemes. On the
supervisory side, minimum harmonisation in accordance with the home country principle
would be coherent with the supervisory architecture of Solvency II as it would reinforce
incentives for the adequate supervision of cross-border branches and direct sales of
national insurers. It would also complement and follow the same approach as the
proposed revision of the Motor Insurance Directive that ensures third party protection in
the case of insurance failure for the specific product of motor third party liability.
Winners and losers: Overall, policyholders would benefit from EU action that would
offer them an increased protection in the event that insurers fail irrespective of their place
of residence and of where they bought their insurance cover. The associated costs could
be seen as a premium for being insured against such failure. In exchange, policyholders
and beneficiaries would have the certainty that their eligible claims would be covered,
even in adverse circumstances. Similarly, the EU action on IGS would benefit taxpayers,
as the likelihood that public resources would need to be used in the future in case of
default of an insurance undertaking would be reduced. On the one hand, as explained
above, where no pre-funded IGS has been established so far, or in the cases where the
scope would need to be extended, insurance companies and policyholders would face
additional financial costs. On the other hand, EU action would eliminate the existing
duplication of levies that might currently be imposed on firms that perform cross-border
activities. In addition, an IGS framework would contribute to reinforcing market
discipline, level-playing field and competitiveness and ensure a better functioning of the
internal market for insurance that would be beneficial for insurance companies as a
whole. Finally, existing IGS schemes would be affected to the extent that the framework
established at EU level deviates from the national IGS framework in place, in particular
Page | 63
where the minimum level of protection established at EU level would exceed their
coverage.
Stakeholder views: During the Commission’s public consultation, participants were
asked whether IGSs should become mandatory across the EU. Overall, views were split
among respondents. NGOs/consumers/citizens who expressed a view were largely in
favour. The main rationale behind supporting the requirement to set up IGS was the
enhancement of policyholders’ protection and the strengthening of the Single Market. By
contrast, public authorities and insurance industry representatives that responded to the
consultation were mainly opposed. A strong focus on proportionate minimum
harmonisation takes these concerns into account. However, a quarter of the industry
respondents, notably five national insurance associations, supported IGS minimum
harmonisation. In the Commission expert group, a majority of Member States was of the
opinion that minimum harmonisation would be beneficial (see Annex 2). During
EIOPA’s consultation activities, several stakeholders agreed that there should be a
minimum degree of harmonisation but that its legal structure should be left to national
discretion. Other stakeholders, mostly from the industry, were against a harmonisation in
the field of IGSs. Some respondents also pointed at a lack of harmonization of the
supervisory practices (see Sub-section 6.1.3 of the Evaluation Annex) and of recovery
and resolution frameworks.
6.4.4. Choice of preferred options
The below tables provides a high-level summary of how the previously described options
compare and interact (note that for the sake of readability of the tables, the labels of the
Options have been shortened). The incremental impacts of each of these options remain
broadly similar whether they are compared to the baseline option or between them, as
alternatives to foster policyholder protection.
In relation to Option 2, the assessment has to reflect possibly contradictory effects of
changes on group supervision and cross-border supervision. For instance, regarding
effectiveness on quality of supervision, there is a strong added value of changes in
relation to group supervision due to the removal of legal gaps and uncertainties. In
relation to cross-border supervision, while the effect of Option 2 is overall positive, the
added value depends on the extent to which the principles embedded in existing soft
convergence tools (notably the Decision on Collaboration) are already applied by
national authorities (for those countries which already full apply those principles, the
improved effectiveness would be limited).
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financial
stability
Option 1 – Do nothing 0 0 0 0 0 0 0 0
Option 2 – Improve quality
of supervision
+ + 0 0 ++ + ++ ++
Option 3 – Introduce rules
to avert / manage failing
insurers
0 0 0 + ++ ++ ++ ++
Option 4 – Introduce rules
to protect policyholders
when insurers fail
+ 0 0 0 +++ + ++ ++
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Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 +/- ++ +/-
Option 3 +/- ++ +
Option 4 - +++ 0
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Remedying legal uncertainties and strengthening the way supervisors apply Solvency II
and cooperate, in particular in a cross-border context is a prerequisite to improving
quality of supervision and policyholder protection. Similarly, reinforcing the
coordination and mediation role of EIOPA would be coherent with the maximum
harmonisation approach of Solvency II in relation to supervision. Therefore, Option 2
would be effective in improving the quality of ongoing supervision of insurance
companies and groups and improve the level-playing field and the integration of the
Single Market for insurance services. However, considered alone, it would not contribute
fully to the objectives of an EU action in terms of addressing adequately the management
of an insurer’s failure and ensuring policyholders’ protection in such a case.
In order to foster further supervisory convergence and support policyholder protection,
Option 3 would further clarify and strengthen the Solvency II provisions that aim at
addressing the deterioration of the financial situation of insurers. However, as the
possibility of an insurance failure can never be entirely excluded, Option 3 would also
implement a resolution framework that would ensure the continuity of an insurer’s
important functions for the economy, minimise reliance on public financial support and
mitigate the adverse effects on financial stability in comparison to normal insolvency
proceedings. Therefore, these additional benefits of Option 3 in terms of reducing
negative social and welfare effects of an insurer’s failure would justify the additional
costs of recovery and resolution planning as long as they are applied in a proportionate
manner.
At the same time, normal insolvency proceedings would remain a possibility under
Option 3. In this case, as illustrated by recent insurance failures, it cannot be excluded
that losses have to be borne by policyholders. In addition, even in the context of a
resolution framework, the successful implementation of some tools, such as a transfer of
portfolio, may require to haircut the value of some policies. Options 2 and 3 alone would
thus not ensure that policyholders are shielded completely from social or financial
hardship resulting from their insurer’s failure. Depending on the judgement on the need
to mitigate these risks for individual policyholders in all Member States, Option 4 could
implement an effective IGS protection that would safeguard the confidence of consumers
in the Single Market for insurance and ensure a level-playing field across the EU. By its
design, Option 4 would contribute to fostering market discipline and to incentivise
insurers to adequately monitor and manage their risks. It would also contribute to the
effectiveness of Option 2 by reinforcing the incentives for supervisors to exert
appropriate oversight on cross-border business. However, Option 4 would entail
additional implementation costs the amount of which would depend on the design and on
the starting point of the different Member States, as explained in above and in Annex 5.
In conclusion, all three options are complementary and contribute together to the
achievement of the objectives set for EU action.
Page | 65
The preferred options to address Problem 4 are Option 2 (Improve the quality of
supervision by strengthening or clarifying rules on certain aspects, in particular in
relation to cross-border supervision)89 and Option 3 (Introduce minimum
harmonising rules to ensure that insurance failures can be better averted or
managed in an orderly manner). Option 4 (Introduce minimum harmonising rules
to protect policyholders in the event of an insurer’s failure) presents costs and
benefits according to the desired level of protection for policyholders across the EU
in case of failures of insurers that need to be considered in the broader context of
the current focus on economic recovery.
6.5. Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector
6.5.1. Option 2: Make targeted amendments to prevent financial stability risks
Under Option 2, targeted amendments to the framework would be introduced to prevent
the building-up of systemic risks stemming from or amplified by the insurance and
reinsurance sector, which could be detrimental to financial stability. Those tools would in
particular aim at:
- Better incorporating macro-prudential considerations in insurers’ investment and
risk management activities: insurance companies would be required to take into
account how the macroeconomic developments can affect their underwriting and
investment activities, and reciprocally how their activities may affect market
drivers;
- Preventing liquidity risks: insurance companies would be required to strengthen
liquidity management planning and reporting, while supervisors would be able to
intervene whenever any resulting liquidity vulnerabilities are not appropriately
addressed by insurers. In addition, as a last resort measure, supervisory authorities
would have the power to temporarily freeze redemption options on life insurance
policies to avoid “insurance run”;
- Avoiding excessive risk-taking: prudential rules would be amended so that
banking-type loan origination activities by insurers are not subject to a more
preferential treatment than in the banking sector thus preventing regulatory
arbitrage and curtailing “shadow-banking”;
- Preserving capital position of vulnerable insurers during exceptional situations: in
crisis situations, supervisory authorities would be granted the power to restrict or
suspend dividend distributions and variable remunerations on a case-by-case
basis, in order to preserve an appropriate capital position for the insurance sector.
Where necessary, EIOPA would be mandated to develop technical standards or guidance
regarding operational details of these tools.
Benefits
Option 2 would determine a very tangible improvement of the ability of supervisors
to monitor and prevent systemic risks stemming from or affecting the insurance
sector. In addition, this option would further reduce pro-cyclical behaviours by insurers90
and would ultimately produce positive effects for the stability of financial markets in the
longer term. Insurers would be required to incorporate macro-prudential considerations in
their underwriting and investment activities, which would limit excessive risk-taking
89
Please refer to Sections 4 and 5 of Annex 8 for further details on amendments to the rules governing
group supervision and cross-border supervision.
90
Those pro-cyclical behaviours may destabilise market pricing.
Page | 66
behaviours. Supervisors would be entitled to intervene in case of liquidity vulnerabilities
that are not addressed or to ensure prudent capital management during crisis situations, in
the interest of policyholders and to preserve financial stability. Option 2 would also be in
line with a risk-based framework, because supervisory intervention on dividends
policies would be entitled only when justified by the application of risk-based
considerations and criteria. As there is no quantitative requirement for liquidity risk as in
the banking sector, those additional tools would ensure that liquidity risk is appropriately
monitored and controlled without imposing standardised liquidity metric which would
not be fit for the specificities of different insurers’ business models.
In addition, while not affecting volatility and not directly improving risk sensitivity,
Option 2 would still require that insurers better take into account sector-wide
developments and liquidity risks in a prospective manner, and therefore would provide
good incentives for improved risk management beyond capital requirements.
Costs
Option 2 could possibly depress, to a certain extent, insurers’ ability to invest in
activities which may provide long-term and sustainable financing to the economy.
However, this would only occur when prudentially justified (for instance the inclusion of
a macro-prudential dimension in investment activities could discard some specific
investments which may generate financial stability risks although they could still allow
for better expected returns for policyholders), and with the aim of ensuring the long-term
stability of financial markets and the broader economy. In addition, additional focus on
liquidity risks may prompt insurers to divest from certain “illiquid” assets if these
contribute to systemic risks, although such investments could be considered beneficial
for the purpose of achieving the CMU objectives (e.g. investments in unlisted equity of
SMEs).
Option 2 would increase the complexity of the framework because it would introduce
new risk management requirements for insurers. Still, Option 2 would also aim at
ensuring that the new requirements are implemented in a proportionate manner. For
instance, EIOPA proposes that supervisory authorities should have the power to waive
requirements in relation to liquidity risk management planning depending on the nature,
scale, and complexity of the insurer’s activities.
Although Option 2 would grant supervisors with a common set of macro-prudential tools
to prevent systemic risks, it cannot be excluded that supervisors facing similar systemic
risks emerging at national level would not act in the same way. Even with guidance and
coordination at EU level, supervisors would still be in a position to deviate from
supervisory recommendations put forward by EIOPA or the European Systemic Risk
Board (ESRB). Such an issue already materialised in the context of the statements by
EIOPA and the ESRB in 2020 to prohibit dividend distributions by European insurers,
where some NSAs decided to deviate from EIOPA’s approach (i.e. insurers in some
countries could distribute dividends whereas their direct competitors in others could not).
A lack of harmonisation in supervisory responses to financial stability concerns may
hinder public authorities’ ability to address sector-wide systemic risks at European level,
considering that macro-prudential policy would largely remain a national competence.
However, Option 2 would still be an improvement compared to the baseline as public
authorities would still be granted new powers to prevent financial stability risks at least at
national level. Option 2 would also negatively affect the level-playing field if some
insurers were imposed additional requirements (e.g. dividend restrictions) whereas their
competitors were not while facing similar risks. Similarly, in relation to waivers of some
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requirements (e.g. liquidity requirements), EIOPA proposes to issue guidelines, but those
non-binding tools would not necessarily ensure consistency across Member States.
The new tools would be in line with the international framework for systemic risk91
, and
would not result in an increase in capital requirements. However, the power for
supervisors to restrict or suspend dividend distributions could increase financing costs for
European insurers compared to non-European ones. Therefore, Option 2 would have a
slightly potential negative impact on insurers’ international competitiveness. On the
other hand, such restrictions could improve or preserve the solvency ratio of insurers
during exceptional situations (such as adverse economic or market events), and thus
contribute to policyholder protection and the preservation of financial stability.
Finally, Option 2 would imply moderate implementation costs for the insurance
industry. Indeed, based on a survey included in EIOPA’s impact assessment, 61% of
insurers do not currently include a macro-prudential perspective in their investment and
risk management activities, and among them, 59% (i.e. 36% of all insurers surveyed)
identify that such a requirement would generate significant additional costs (although
such costs are not quantified). Similarly, almost half of insurers (48%) do not yet produce
a liquidity risk management plan. However, EIOPA estimates that drafting and
maintaining such a plan involves very limited additional human and financial resources
as shown in the below table:
Staff costs
Other costs (including IT and fees to
externals)
Average one-off
costs
0.46 full-time equivalent
(FTE)
= 0.06% of total employees
€ 30,546
= 0.0008% of liabilities towards
policyholders
Average
ongoing annual
costs
0.41 full-time equivalent
(FTE)
= 0.05% of total employees
€ 14,233
= 0.0004% of liabilities towards
policyholders.
The additional cost of reviewing such plans would also be limited for supervisory
authorities. EIOPA considers that the average one-off cost for public authorities would
lie between 0.05 and 3 FTE, and the average ongoing cost between 0.03 and 2 FTE.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would be effective in preventing
systemic risks without overburdening the current system. It would therefore be coherent
with one of the main objectives of Solvency II, namely financial stability. In addition,
Option 2 would be consistent with the international standards; regulatory capital
requirements would remain based on the risks faced by individual insurers and excessive
risk-taking would be prevented without introducing limitations to insurers’ ability to
invest for the long-term, nor through additional “cost of capital”. Still, supervisors would
have new tools to address excessive risk taking and liquidity risks, and to ensure that
macro-prudential concerns are appropriately embedded in insurers’ activities.
Implementation costs for such new tools would be moderate. Efficiency would be
achieved as more “far-reaching and stronger” tools (liquidity and capital buffers,
concentration limits), while contributing to financial stability, may generate additional
costs (including opportunity costs in terms of contribution to the long-term and
91
The possibilities to impose capital surcharges for systemic risk and/or to set soft concentration thresholds
on investments are only mentioned in the “Guidance” part of the IAIS Insurance Core Principles (see ICP
10.2.6). According to the IAIS, “Guidance facilitates the understanding and application of the Principle
Statement and/or standards; it does not represent any requirements”.
Page | 68
sustainable financing of the economy and international competitiveness) and uncertain
benefits. In fact, the added value and the appropriateness of those “far-reaching” tools
have not been demonstrated and remain at this stage hypothetical. Finally, regulatory
arbitrage between banks and insurers regarding banking-type activities would be
prevented and the role of supervisors would be enhanced in the context of liquidity risks,
although no discretionary powers to impose “liquidity buffers” would be introduced.
EIOPA and ESRB would continue to be central in exercising systemic risks’ oversight
and facilitating dialogue and coordination among NSAs, although national authorities
would still have the final word.
Winners and losers: Improved financial stability would have no direct effect on
policyholder protection. However, financial instability risks and possible spill-over
effects on the real economy could affect policyholders both as taxpayers (since business
failures and economic recession may require public intervention) and as workers (since
EIOPA demonstrates that there is a correlation between financial instability and
unemployment). On the contrary, some of the tools embedded in Option 2 (in particular,
the power to freeze the exercise of surrender options on life insurance contracts) may be
considered detrimental to policyholders in the short term. However, this would only be a
last resort measure to avoid the failure of an insurer, which may result in financial losses
for all remaining policyholders in the longer run.
The impact of Option 2 is mixed. Shareholders of insurers might be considered losers in
the short term because of the possibility of dividend restrictions, however as such
restrictions would strengthen the solvency position of insurers and thus their probability
of survival, shareholders might win in the long run. Similarly, insurers conducting
banking-type loan origination activities may face a slight increase in capital requirements
due to more convergence with banking rules but this might benefit the economy in the
long term as the risk of regulatory arbitrage is reduced. Insurers might also be considered
winners as the possibility to freeze redemption rights would make them less exposed to
liquidity risk under stressed circumstances. Other changes embedded in Option 2 would
not make it more costly for them to conduct their underwriting and insurance activities.
There would still be some implementations costs in relation to the development of
enhanced risk management and reporting systems, which would include the macro-
prudential dimension. However, as explained above, a number of insurers already embed
such requirements in their processes (and thus those would face no implementation
costs), and the implementation costs for those which do not apply them yet would remain
moderate. Option 2 would also have a limited negative impact on insurers’ capacity to
compete at international level with non-European insurers. Supervisors would be winners
compared to the status quo, although they may not be largely satisfied by Option 2
because they would not get a fully-fledged set of new powers as proposed by EIOPA and
the ESRB and may consider they lack certain tools to address potential systemic risks. At
the same time, Option 2 would not limit the wide margin of discretion that they have in
the exercise of macro-prudential supervision.
Stakeholder views: The feedback to EIOPA’s and the Commission’s consultations are
not fully consistent. In the context of EIOPA’s consultations, the vast majority of
stakeholders expressed the view that should amendments be brought to Solvency II in
order to incorporate a macro-prudential dimension, such changes should remain limited,
broadly in line with Option 2. The situation is however more nuanced for respondents to
the Commission’s public consultation, where only 27% of respondents (42% if we
exclude those who did not provide an answer to the question) expressed support for
targeted amendments only (the alternatives being either no change or a broad range of
new powers). However, among public authorities, 63% (71% if we exclude those with no
Page | 69
answer) express support for targeted amendments. A specific question of the
Commission’s consultation was about circumstances in which public authorities should
have the power to freeze surrender rights. The majority of respondents expressed support
for such a power, either at the level of individual insurers when they are in weak financial
position or in financial distress (41%) or at sectoral level (24%). This applies to all
stakeholder categories.
6.5.2. Option 3: Introduce an extensive macro-prudential framework
Under Option 3, a broad range of macro-prudential tools would be included in Solvency
II, which are partly inspired from the banking sector although adapted to the insurance
context. In addition to those tools already mentioned in Option 2, Option 3 would grant
additional powers to supervisors with the aim of further avoiding excessive risk-taking
activities and liquidity risk.
In relation to risk-taking, Option 3 would encompass, in addition to the tools already
covered by Option 2, the following discretionary powers for NSAs, subject to possible
EIOPA’s technical standards and guidance where deemed appropriate:
- imposing capital surcharges for systemic risk to single insurers that are deemed
“too big to fail” or to insurers whose common (herding) risky behaviour may
pose issues to financial stability, and/or countercyclical buffers in order to
increase own fund requirements when market credit spread levels are lower than
their historical average and may indicate the presence of a system-wide
underestimation of risks (i.e. to ensure that insurers establish a buffer against
future increases in spreads);
- imposing (soft) concentration limits on investments so that supervisors can decide
to intervene when insurers’ investments are deemed excessively concentrated in
certain asset classes or sectors and public authorities consider that systemic risks
may be generated or amplified by these asset classes or sectors;
- requiring the establishment and maintenance of a systemic risk management plan
(SRMP) so that insurers that are deemed to be systemic or to undertake
systematically risky activities have to plan and report to supervisors all applicable
measures that they intend to undertake in order to address their systematically
risky activities;
- prohibiting at sector-wide level dividend distributions and variable remuneration
under crisis situations, regardless of the individual solvency position of insurers.
In relation to liquidity, under Option 3, supervisors would impose, in addition to the tools
of Option 2, discretionary liquidity buffers to insurers that they deem to have a
“vulnerable” liquidity profile (for instance, high exposure to derivatives, which may
generate risks of massive margin calls if financial markets deteriorate). Those buffers
would be calculated based on standardized liquidity metrics inspired from the banking
sector, but adapted to the insurance context.
Benefits
Option 3 would have a very positive effect on the ability of supervisors to preserve
financial stability and address systemic risks stemming from or affecting the insurance
sector. This option would also contribute to stabilise financial markets in the long term
by avoiding excessive concentrations or excessively risky behaviours of insurers.
Supervisors would indeed be granted with a large set of tools aiming at (i) limiting
insurers’ risk taking activities which may generate “price bubbles”, (ii) ensuring that
insurers are not exposed to material liquidity risks, including in relation to margin calls
on derivative transactions and possible massive exercise of surrender options by
Page | 70
policyholders and (iii) preserving the financial solvency of the sector by limiting
insurers’ ability to make payments to shareholders under crisis situations. Capital
surcharges may mitigate both entity based92
, activity-based93
and behaviour-based
sources of systemic risk. Concentration thresholds would be “soft” thresholds, in the
meaning that the intensity of the supervisory response to a breach of threshold would be
fully discretionary (and may consist in simply engaging dialogue between the supervisor
and the firm). Liquidity buffers would be based on standardized liquidity metrics and
would ensure that liquidity risk is assessed in a consistent way across Europe, although
the decision to impose such buffers would remain discretionary.
In addition, Option 3 would, to a certain extent, improve risk sensitivity by taking into
account the state of financial markets (in particular credit spreads) in capital
requirements. In addition, it would ensure that the risk related to loan origination
activities is not underestimated compared to the banking sector (by making risk factors of
the Solvency II counterparty default risk more consistent with those of the banking credit
risk framework). This would be an improvement to policyholder protection.
Finally, Option 3 would be in line with international agreed standards, which require
supervisors to act appropriately to reduce systemic risk when identified, assess the
potential systemic importance of insurers and target supervisory requirements to those
insurers.
Costs
Option 3 would affect insurers’ ability to contribute to the long-term sustainable
financing of the economy. Option 3 would indeed imply that certain insurers, if
systemic risks are identified, may be incentivised or required to hold more liquid (due to
the liquidity buffers) and less risky assets (i.e. cash and money-market funds, due to
capital surcharges or concentration limits) to the detriment of asset classes such as equity,
bonds and securitisations. While macro-prudential tools would be subject to supervisory
discretion, the uncertainty surrounding their use by public authorities may indeed
incentivise insurers to anticipate such restrictions and implicitly embed them in their
investment behaviour and capital management, in particular if public authorities indicate
that they identify systemic risks in these asset classes. Option 3 would also reduce
insurers’ profitability, as the capital surcharges and concentration limits, where applied,
may increase capital costs or reduce investment opportunities. In turn, their activation
would have a negative impact on EU insurers’ international competitiveness, as these
specific tools are not part of the macro-prudential framework in other jurisdictions. The
risk of being restricted in investment decisions or in dividend distributions would put
European insurers at a disadvantage vis-a-vis their international competitors, albeit at the
benefit of being better prepared to cope with systemic risks. The uncertainty for investors
regarding the actual level of capital requirements (including buffers) on insurers and
decisions on dividend restrictions may increase the relative financing cost for EU
insurers compared to third-country companies. In addition, lower risk taking would also
limit insurers’ ability to supply (life) insurance policies that meet consumers’ demand.
92
i.e. preventing the failure of an insurer that is “too-big-to-fail” at national level. Note that in the context
of the “holistic framework for systemic risks” developed at international level, no insurer has been
identified as globally systematically important at this stage. However, the IAIS Holistic framework
requires supervisors to have ‘an established process to assess the potential systemic importance of
individual insurers and the insurance sector.’
93
i.e. reducing contagion risks stemming from non-insurance activities conducted by insurers (e.g.
banking-type activities which may be systemic).
Page | 71
Although EIOPA’s Opinion highlights that macro-prudential tools should be
implemented in a proportionate manner, no concrete safeguard is proposed to ensure that
this principle is satisfied. As shown in Section 6.2 of the Evaluation Annex, a general and
abstract principle of proportionality does not result in an effective implementation within
Solvency II. Therefore, Option 3 would not guarantee that its effective implementation
would ensure coherence with the overarching principle of proportionality embedded in
Solvency II. Ensuring proportionality would require further conditions or technical
standards that have not been developed by EIOPA as part of its Opinion on the Solvency
II review. In any case, Option 3 would imply that the framework would become more
complex and less predictable for firms, notably in terms of capital management
policies.
In addition, most of the tools that would be introduced as part of this option would be
largely discretionary in nature (e.g. capital surcharges would be defined subject to
supervisory judgement, the level of concentration thresholds and supervisory response to
a breach of thresholds would be discretionary, as well as the definition of liquidity
buffers or restrictions on dividend payments). Although EIOPA’s Opinion acknowledges
that further guidance or technical standards would be needed at a later stage (through
non-binding guideline by EIOPA for instance), Option 3 could lead to further
inconsistencies between national supervisory processes, as also explained in Option 2.
If the very same situation does not trigger a similar supervisory response (e.g. no
application of capital surcharge for systemic risk in one jurisdiction but imposition of
such buffers in others), there would be a risk of unequal level-playing field within the
European Union, as some jurisdictions may be less willing to address systemic risks than
others.
Finally, Option 3 would imply moderate implementation costs for the insurance
industry. In addition to those identified in Option 2, the main additional implementation
cost would be in relation to systemic risk management plans. EIOPA estimates that the
drafting and maintenance of both liquidity management and systemic risk management
plans involves limited additional human and financial resources as shown in the below
table.
Staff costs
Other costs (including IT and fees to
externals)
Average one-off
costs
0.96 full-time equivalent (FTE)
= 0.13% of total employees
€ 70,879
= 0.0022% of liabilities towards
policyholders
Average ongoing
annual costs
0.81 full-time equivalent (FTE)
= 0.11% of total employees
€ 49,923
= 0.0014% of liabilities towards
policyholders.
The additional cost of reviewing such plans would also be limited for supervisory
authorities. EIOPA considers that the average one-off cost for public authorities would
lie between 0.1 and 6 FTE, and the average ongoing cost between 0.08 and 4 FTE.
Overall assessment
Effectiveness, efficiency and coherence: By granting all the necessary tools that may be
needed to address macro-prudential concerns, Option 3 would be the most effective
option to preserve financial stability. However, if Option 3 was chosen, the EU would go
further than other jurisdictions in addressing potential sources of systemic risks (for
instance widespread collective reactions of firms to exogenous market shocks). Some of
the sources of systemic risks in the insurance sector remain quite theoretical until now as
Page | 72
they have not materialised yet. Furthermore, the articulation between risk-based capital
requirements and capital surcharges defined at individual level to prevent excessive risk
taking is not straightforward. In particular, as discussed as part of the first problem on
long-term and sustainable financing of the economy, it is acknowledged that capital
requirements – although not being the main driver of investment decisions – may
generate undue disincentives to invest in certain asset classes, in particular equity.
Introducing the power for supervisors to impose systemic capital surcharge or
concentration thresholds on equity investments would contradict such diagnosis. It could
also undermine any solution aiming to address the insufficient incentives for long-term
equity financing in situations where further investments in equity would not affect
policyholder protection94
. Furthermore, the risk-based nature of capital requirements
makes it less justified to add capital buffers or to impose ex-ante concentration thresholds
at individual level. Capital requirements in Solvency II are conceived in a way that
insurers are actually discouraged to take excessive risk on assets which generate high
capital charges (or otherwise they would have to be so highly capitalised to be in a
position to weather market downturns and stick to their investments when the economic
cycle is at a low level).
The main exception would be government bonds because they are not subject to any
capital charge under standard formula rules (therefore, quantitative rules do not deter
concentration in such investments). However, the “prudent person principle” embedded
in Solvency II ensures that the risk of concentration in any asset class or in certain
counterparties is duly monitored and mitigated by insurers. An expansion of such
principle to integrate “macro-prudential” considerations (as envisaged in both Option 2
and Option 3) would similarly enhance supervisors’ possibility to discourage excessive
concentrations or excessive expositions to temporary “price bubbles”. Similarly,
countercyclical buffers, which could be imposed when spreads are low (as proposed by
the ESRB), would be to a certain extent redundant because the risk of rising spreads is
already captured in existing capital charges for spread risks. This was the reason why this
tool was not retained in EIOPA’s final Opinion.
In addition, as described above, the additional tools which are conceived as part of
Option 3 would make it more difficult for insurers to compete at international level and
more costly for them to invest in “real” assets (which may be more risky and less liquid).
Option 3 would be coherent with the objectives of Solvency II (financial stability)
although it may enter in conflict with other political objectives (e.g. facilitating insurers’
contribution to the Capital Markets Union). In addition, the power for supervisors to
impose a sector-wide blanket ban on dividend distributions without the application of
risk-based criteria related to the risk appetite limits/tolerance, which are firm-specific,
would undermine the credibility of capital requirements. In fact, under this approach,
even an insurer which is very well capitalised (e.g. with a solvency ratio above 300%)
could be subject to such restrictions if a sector-wide blanket ban was imposed.
Winners and losers: Like in Option 2, policyholders would be in a relatively neutral
position, as improved financial stability would have no short-term direct effect on
policyholder protection (while only indirect effect on taxpayers and workers in the longer
term). However, if financial stability was threatened, insurance firms, as well as
policyholders, would be affected. On the contrary, some of the tools embedded in Option
3 (e.g. power for NSAs to freeze the exercise of redemption options on life insurance
94
Note that the Solvency II asset class for long-term investment in equities relies on criteria some of which
aim at ensuring that insurers can stick to their investments and are not exposed to forced selling at
deteriorated market prices under stressed situations.
Page | 73
contracts) may, like in Option 2, be harmful to some policyholders in the short term.
Insurers would be losers under Option 3 as it would be more costly for them to conduct
their activities, and to generate return on investments, in particular because potential
capital surcharges for systemic risks and concentration limits on investments may
constrain their ability to “search for yield” and their capital management. On the other
hand, Option 3 might be beneficial for their longer-term survival, as well as for
preventing such kinds of behaviour for financial stability purposes. Option 3 would also
make it more difficult to compete at international level with non-European insurers that
are not subject to similar rules. Shareholders would thus lose as they could receive less
dividends. On the other hand, shareholders would lose if insurance companies were to
fail more easily during exceptional situations (e.g. during a financial crisis). Finally,
supervisors would be largely winners of this option, due to the enhanced and fully-
fledged set of new powers at their disposal and the wide margin of discretion that they
would have when using them in practice.
Stakeholder views: The vast majority of respondents to EIOPA’s consultations opposed
the introduction a fully-fledged macro-prudential framework in Solvency II. This is more
or less in line with the Commission’s public consultation where only 22% of respondents
who expressed a view supported a broad set of new tools in Solvency II. Support ranges
from 13% (public authorities) to 30% (NGOs/consumers/citizens) depending on the
stakeholder category. Therefore, Option 3 would receive limited support by stakeholders.
As regards the power to freeze surrender rights, please refer to the summary provided as
part of the analysis of Option 2.
6.5.3. Choice of the preferred option
The below tables provides a high-level summary of how the previously described options
compare (note that for the sake of readability of the tables, the labels of the Options have
been shortened).
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financial
stability
Option 1 – Do nothing 0 0 0 0 0 0 0 --
Option 2 – Make targeted
amendments to prevent
financial stability risks
- + 0 +/- -- ++ + ++
Option 3 – Introduce an
extensive macro-prudential
framework
--- + + - --- +++ --- --
Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 +/- + +/-
Option 3 --- ++ +++
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Option 3 would be the most effective in preserving financial stability. However, it could
generate significant additional costs for capital management for the insurance industry.
Page | 74
There is no evidence that those costs outweigh the added value of the new powers that
would be granted to supervisors. In addition, the material risk of inconsistent approach in
their application may also be detrimental to the level-playing field. In comparison,
Option 2 seems to find the right balance between the need to enrich the supervisory
toolkit to address systemic risks, in line with international standards, while ensuring a
proportionate increase in complexity and limited additional costs for the capital
management of the insurance industry.
The preferred option to address Problem 5 is Option 2 (Make targeted amendments
to prevent financial stability risks)95.
7. PREFERRED COMBINATION OF OPTIONS
As discussed in Section 6, the selection of certain options to achieve an objective has
been done with the aim of maximizing the effectiveness in addressing the specific
objective related to a problem while limiting the costs and potential negative side effects
on other specific objectives.
The following tables summarize the impact of the different preferred options.
95
Please refer to Section 6 of Annex 8 for further details on the macro-prudential framework stemming
from the preferred option.
Page | 75
Summary of winners and losers
Insurers Policyholders
Supervisory
authorities
Baseline: Do nothing (in all areas) 0 0 0
Limited incentives for insurers to contribute to the long-term financing and the greening of the
European economy
Option 2: Facilitate long-term investments in
equity
++ +/- +
Option 4: Strengthen “Pillar 2” requirements in
relation to climate change and sustainability risks
- +++ +
Insufficient risk sensitivity and limited ability of the framework to mitigate volatility of the
solvency position of insurance companies
Option 3: Address issues of risk sensitivity and
volatility while balancing the cumulative effect of
the changes
+ ++ -
Insufficient proportionality of the current prudential rules generating unnecessary
administrative and compliance costs for small and less complex insurers
Option 3: Give priority to enhancing the
proportionality principle within Solvency II and
make a smaller change to the exclusion
thresholds.
++ - -
Deficiencies in the supervision of (cross-border) insurance companies and groups, and
inadequate protection of policyholders against insurers’ failures
Option 2: Improve the quality of supervision by
strengthening or clarifying rules on certain
aspects, in particular in relation to cross-border
supervision
+/- ++ +/-
Option 3: Introduce minimum harmonising rules
to ensure that insurance failures can be better
averted or managed in an orderly manner.
+/- ++ +
Option 4: Introduce minimum harmonising rules
to protect policyholder in the event of an insurer’s
failure
- +++ 0
Limited specific supervisory tools to address the potential build-up of systemic risk in the
insurance sector
Option 2: make targeted amendments to prevent
financial stability risks in the insurance sector
+/- + +/-
Page | 76
Effectiveness Efficiency
(Cost-
effectiveness)
Coherence
LT green
financing
Risk
sensitivity
Volatility Proportionality
Supervision - protection
against failures
Financial
stability
Baseline: Do nothing (in all areas) 0 0 0 0 0 0 0 --
Limited incentives for insurers to contribute to the long-term financing and the greening of the European economy
Option 2: Facilitate long-term investments in equity ++ - - 0 + - ++ ++
Option 4: Strengthen “Pillar 2” requirements in relation to
climate change and sustainability risks
+ 0 0 0 + ++ + ++
Insufficient risk sensitivity and limited ability of the framework to mitigate volatility of the solvency position of insurance companies
Option 3: Address issues of risk sensitivity and volatility while
balancing the cumulative effect of the changes
+++ ++ +++ - - ++ ++ ++
Insufficient proportionality of the current prudential rules generating unnecessary administrative and compliance costs for small and less complex insurers
Option 3: Give priority to enhancing the proportionality
principle within Solvency II and make a smaller change to the
exclusion thresholds.
0 0 0 +++ - - ++ +
Deficiencies in the supervision of (cross-border) insurance companies and groups, and inadequate protection of policyholders against insurers’ failures
Option 2: Improve the quality of supervision by strengthening
or clarifying rules on certain aspects, in particular in relation to
cross-border supervision
+ + 0 0 ++ + ++ ++
Option 3: Introduce minimum harmonising rules to ensure that
insurance failures can be better averted or managed in an
orderly manner.
0 0 0 + ++ ++ ++ ++
Option 4: Introduce minimum harmonising rules to protect
policyholder in the event of an insurer’s failure
+ 0 0 0 +++ + ++ ++
Limited specific supervisory tools to address the potential build-up of systemic risk in the insurance sector
Option 2: make targeted amendments to prevent financial
stability risks in the insurance sector
- + 0 +/- -- ++ ++ ++
Page | 77
7.1. General impacts96
Most options retained have a positive effect in supporting insurers’ long term and
sustainable financing of the European economy. By facilitating the use of the long-
term equity asset class which benefits from a preferential treatment, by requiring that
insurers incorporate climate and sustainability considerations in their investment and
underwriting activities, and by reducing the volatility of the framework, insurers benefit
from a conducive prudential environment, which fosters long-termism and sustainability
in investment decisions. Other options retained, which reduce regulatory compliance
costs and facilitate the dissemination of insurance supply that can improve resilience
against climate change and/or natural catastrophes, also have a positive impact. The
proposal to make targeted changes to Solvency II in relation to financial stability may
hinder the objective of long-term financing and greening of the economy. It achieves
however the appropriate trade-off between what is needed in order to ensure that public
authorities have the appropriate toolkit to address systemic risks, and the limitation of
side effects on the political objectives of the Capital Markets Union and the European
Green Deal. In addition, the framing of the revised criteria for long-term investments in
equity would aim at rewards where insurers are able to avoid forced selling under
stressed situations, which limits the risk that the insurance sector could amplify systemic
financial market turmoil.
Furthermore, the combination of preferred options reduces volatility, but also improves
risk sensitivity by appropriately reflecting the risk of negative interest rates in capital
requirements and in the valuation of insurers’ liabilities towards policyholders. The
clarification of prudential rules in relation to group supervision, and the targeted
amendment on macro-prudential supervision in relation to banking-type activities by
insurers (to remove risks of regulatory arbitrage) also contribute to improving risk
sensitivity. However, the revision of the eligibility criteria for long-term equity
investments, which aims at facilitating its use by insurers, would reduce the risk-
sensitivity of the framework as EIOPA’s analysis concludes that the preferential
treatment on such investments is not justified by evidence. Still, EIOPA did not
recommend removing this asset class, and on the contrary supported the objective of
clarifying supervisory criteria for its use. There is a clear trade-off between risk
sensitivity and facilitation of long-term equity, but the deterioration of risk sensitivity
generated by the facilitation of the use of the long-term equity asset class seem limited
(as the classification criteria remain robust) and are justified by the political priority
given to the completion of the Capital Markets Union. Still, overall, the level of prudence
of the framework is slightly increased compared to current rules.
One key consideration is the overall balance of the review in terms of capital
requirements. Based on EIOPA’s impact assessment, the Commission services tried to
quantify the impact of all changes brought on the average solvency position of insurers at
two different reference dates. The below table provides a summary of those calculations
– assuming that no transitional period would be introduced. It shows that the impact of
the review depends on how low interest rates are. The review would in all cases improve
the capital surplus at EEA level, although there would be a slight decrease in solvency
ratios. The impact would in any case be spread over several years and would result in the
short term in an increase in capital resources in excess of capital requirements of up to €
96
Please also refer to Annex 3 for further details.
Page | 78
90 billion euros which would facilitate insurers’ contribution to the post-Covid recovery.
At the end of this phasing-in period, the overall impact would depend on market
conditions, but would in any case imply an increase in insurers’ capital resources in
excess of capital requirements as shown in the below table. The below figures which
show the long-term impact of the review are provided for the sample of insurers which
participated to EIOPA’s data collection exercises, as well as for the whole EU market. As
the figures for the whole market are “extrapolated” from the sample, they may be less
reliable. Note that those figures provide a floor to the impact of the review, as they do not
take into account the extinction of older contracts with high guaranteed rates which
generate more capital requirements97
.
Reference date end of 2019 Reference date mid-2020
Change in
solvency ratio
compared to under
current rules
Change in excess own
funds compared to
current rules
Change in solvency
ratio compared to
under current rules
Change in excess own
funds over compared to
current rules
Combined effect
on quantitative
rules of all
recommendations
by EIOPA
-13 percentage
points
(from 247% to
233%)
- EUR 15 billion
(sample)
- EUR 18 billion
(whole market)
-22 percentage
points
(from 226% to
204%)
- EUR 40 billion (sample)
- EUR 55 billion (whole
market)
Combined effect
on quantitative
rules of all
preferred options
-2 percentage
points
(from 247% to
245%)
+ EUR 16 billion
(sample)
+EUR 30 billion
(whole market)
-3 percentage points
(from 226% to
223%)
+ EUR 8 billion
(sample)
+16 EUR billion (whole
market)
In addition, as the negative changes would be gradually implemented over at least five
years, any cost of the review would be smoothened, and insurers would be given
sufficient time to issue new capital or debt instruments if needed. Finally, as the average
solvency ratio by mid-2020 remained above 220%, the few percentage points change in
solvency ratios, spread over five years, would not have had a disruptive effect on the
market. Therefore, the options chosen achieve a balanced – and even positive – outcome
in terms of capital requirements. This also confirms the choice of not introducing those
new macro-prudential tools, which would have an effect on capital requirements, as it
would undermine the objective of “balance” while not being necessarily technically
justified. The technical changes retained in order to address volatility have a slightly
negative impact on the simplicity of the framework, but those changes remain moderate.
The combination of options is improving proportionality by excluding more insurers
from Solvency II and by applying automatic proportionality to a number of insurers,
which have a low-risk profile. As the outcome of the review, up to 20% of insurers
would be excluded from Solvency II, to be compared with 14% under current rules. This
represents a significant increase while ensuring that the vast majority of insurers remain
subject to Solvency II. The technical changes retained in order to address volatility have
a negative but limited impact on the simplicity of the framework. Therefore, overall, the
review would achieve its objective of making the framework simpler for less complex
insurers.
97
More precisely, the negative impact of changes on interest rates is more significant for contracts with
higher interest rates. As such contracts with higher interest rates are usually older, their extinction over
time is expected to result in a lower long-term impact of changes on interest rates. Therefore, at the end of
the phasing-in period, the overall impact of the review is expected to be even more positive than what the
table suggests, as this table does not reflect the extinction of the older contracts.
Page | 79
The quality and consistency of supervision and policyholder protection would be
improved by clarifying rules on group supervision, by remedying gaps in and insufficient
coordination on cross-border supervision, and by considering the introduction of
minimum harmonising rules on recovery, resolution and IGSs. Based on Commission
services’ calculations (see Annex 5), the financial (capital) costs of introducing IGSs for
the industry is estimated to be about 0.12% of annual premiums. In absolute terms, these
estimated costs98
are justified by the benefits of introducing IGSs for policyholders,
taxpayers and the economy more broadly. Clearer rules in those fields also contribute to
improving the level-playing field within the EU, by ensuring that rules are applied
consistently across the EU. The clarification of criteria for long-term equity investments
would also contribute to this objective. However, the enhancement of proportionality, by
excluding more firms from Solvency II, does not support “consistent supervision”, as it
reinforces the co-existence of a European regime with national frameworks. This is also
the reason why it was preferred to prioritise proportionality for firms within Solvency II
rather than to exclude a larger number of companies from the framework. In addition, the
reduction of compliance costs for those firms outweighs the side effects on consistency
of supervision. Should a small insurer want to operate cross-border, it would have to
apply Solvency II. Therefore, the level-playing field within the Single Market would be
preserved and even improved.
Finally, the combination of preferred options contribute to preserving financial
stability, by granting supervisors targeted additional powers to address macro-prudential
risks, including liquidity risk, but also by harmonising recovery and resolution
frameworks that ensures the orderly management of insurers’ failures, which could be
facilitated by IGS funding. As explained above there are trade-offs to be found between
achieving this objective and supporting insurers’ long-term investments in equity (which
implies facilitating risk taking). However, robust criteria for long-term equities (notably
the clarification of expectations on how insurers can demonstrate their ability to hold on
to their investments under stressed conditions) would avoid excessive risk taking.
Similarly, there may also be trade-offs between proportionality and financial stability.
Indeed, by excluding more firms from the mandatory scope of Solvency II, the
combination of options reduces EIOPA’s ability to have a European-wide consolidated
view of macro-trends and the build-up of systemic risks. However, the firms concerned
by exclusions represent less than a few percentage points in terms of both, gross written
premiums and liabilities towards policyholders. Therefore, again, the benefit of
enhancing proportionality outweighs the (limited) side effect on financial stability.
Finally, the cumulative impact of the options achieves a satisfactory balance for all types
of stakeholders. Insurers benefit from better recognition of their long-term business
model, by facilitating long-term investments and reducing the impact of short-term
volatility, and by enhancing proportionality (hence reducing compliance costs).
Policyholders are overall better off by the improved risk sensitivity, and the better
integration of climate risks by insurers, but also by a higher quality of supervision and
new layers of protection provided by the frameworks on recovery, resolution and on
insurance guarantee schemes. Supervisors are relatively neutral with the review. In some
areas, they benefit from clearer rules (e.g. on equity), on others, the framework becomes
more complex to supervise (e.g. on volatility). Supervisors also lose some discretion in
relation to proportionality, but gain new powers to preserve financial stability.
In conclusion, insurers would be subject to a prudential framework that is more
conducive to long-term equity investments and better incorporates the long-term climate
98
As explained in section 6.4.3, these estimated funding costs could actually be lower in the practice.
Page | 80
and sustainability risks. As such, insurers would have stronger incentives to play their
pivotal role in the long-term capital funding and the greening of the European economy,
and to support the economic recovery in the aftermath of the Covid-19 crisis, in line with
the political objectives of the CMU and the European Green Deal. While making the
framework more sensitive and contributing to the main objective of Solvency II
(policyholder protection), the review would not have a market-disruptive impact on
insurers’ solvency ratios and would therefore not materially affect insurers’ international
competitiveness. While remaining very sophisticated, the framework would be designed
in such a way that undue complexity is avoided for low-risk insurers, which would
benefit from more proportionate and simpler rules. The initiative would also strengthen
the trust in the Single Market for insurance services, by ensuring that Solvency II is
applied in a more harmonised and more coordinated manner, in particular in relation to
cross-border business. In addition, a more integrated Single Market would also be
fostered by introducing new layers of policyholder protection against the consequences
of insurers’ (near-)failures through minimum harmonisation on resolution and IGSs.
Finally, existing gaps in the toolbox for macro-prudential supervision would be
addressed in a proportionate manner, by introducing new provisions, which would have a
clear added value to prevent financial instability in line with international standards on
systemic risks. While those tools could have a short-term implementation cost for
insurers, they would benefit in the longer term from more robust risk management and a
lower likelihood of financial instability.
7.2. Impact on SMEs
The review would have a positive impact on SMEs. First, the preferred options on
proportionality would reduce compliance and regulatory costs by both excluding a larger
number of small insurers from the scope of mandatory application of Solvency II, and
enhancing the application of proportionate rules for other smaller and less complex
insurers in the scope of Solvency II (see subsection 7.3 below). Second, all SMEs
(beyond the insurance sector) would benefit from easier access to long term capital
funding. Indeed, one of the preferred options implies simplifying the eligibility criteria
for long-term equity investments, which is expected to facilitate the use of this asset class
by insurers. Eligible equities would benefit from a risk factor of 22% instead of an
average risk factor of 39% for listed equity and 49% for unlisted equity. Long-term
investments in SMEs, which are largely unlisted, would therefore benefit from a higher
capital relief than long-term investments in listed equities. Therefore, insurers would
have an incentive to further provide long-term capital funding to SMEs99
.
7.3. REFIT (simplification and improved efficiency)
The review would only contribute to REFIT cost savings by addressing the problem
insufficient proportionality of the current prudential rules.
99
Note that according to current rules, eligibility criteria are already more flexible for investments in funds,
such as European long-term investment funds pursuant to Regulation (EU) 2015/760, qualifying venture
capital funds and qualifying social entrepreneurship funds as referred to in Article 3(b) of Regulations (EU)
No 345/2013 and 346/2013 respectively. Indeed, for such funds, the satisfaction of the eligibility criteria is
assessed at the level of the fund instead of the underlying assets. The relaxation of the eligibility criteria for
long-term equities would also benefit such funds.
Page | 81
REFIT Cost Savings – Preferred Option(s)
Description Amount (in €) Comments
Extension of
the exclusion
thresholds
from the
mandatory
scope of
Solvency II
Saving of up to
EUR 500 million
in ongoing
compliance costs
for insurers,
which could be
excluded if the
policy option is
implemented.
According to the “Study on the costs of compliance for the financial sector” the
average “general” cost of compliance with Solvency II is € 12 million for one-
off costs, and € 2.7 million for ongoing costs, which represent 3.18% and 0.96%
respectively of total operating costs. Up to 186 firms would be excluded from
the mandatory application of Solvency II due to the increased thresholds. This
benefit would be partly offset by the implementation costs of applying national
prudential frameworks, but those costs cannot be quantified. Additionally, some
firms that are close to the thresholds may reach them in the coming years
(however, we do not have the corresponding figure).
Identification
of low-risk
insurers,
which would
benefit from
automatic
application
of
proportionate
rules
Saving of at least
EUR 50 million
in ongoing
compliance costs
for insurers
We make the conservative assumption that the requirements that can be subject
to proportionality represent between 5% and 10% of total ongoing compliance
costs. At least 249 firms would be identified as of low-risk profile. EIOPA’s
impact assessment does not contain quantitative data. Based on partial data from
the industry, we could estimate that some elements of this policy option
(reduced frequency of the reporting of the ORSA and of the mandatory review
of internal written policies, possibility for the same person to cumulate “key
functions” within a firm) could allow saving approximately up to 1 FTE100
. The
actual figure depends on the size of the company and the proportionality
measures it is applying currently.
8. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
An evaluation of this initiative will be carried out five years after its entry into
application.
Objectives Indicator
Source of
information
Data
already
collected?
Actor(s)
responsible for
data collection
Provide
incentives for
insurers’ long-
term sustainable
financing of the
economy.
% of equity in investment portfolios
Public EIOPA
statistics
Yes EIOPA
Share of insurers’ investments in SMEs
Quantitative
reporting templates
(QRTs)
No EIOPA
% of sustainable assets in investment
portfolios
NFRD disclosures
or QRTs
No
Commission
EIOPA
Improve risk-
sensitivity and
mitigate short-
term volatility in
insurers’
solvency
position
Degree of asset-liability mismatch (duration
gap)
QRTs No EIOPA
Average level of guaranteed interest rate;
difference between that average and long-
term market interest rates
QRTs and EIOPA’s
risk-free curves
Partly EIOPA
Increase
proportionality
of Solvency II to
remove
unnecessary
administrative
Number and share of companies that are
excluded from Solvency II
EIOPA register Yes EIOPA
Number (and percentage) of companies that
are classified as low-risk profile, as well as
their market share;
Number of proportionality measures applied
EIOPA’s report on
proportionality
No EIOPA
100
Source: AMICE.
Page | 82
burden and
compliance
costs
by them.
Number and market share of firms, which
are granted proportionality measures
although they do not meet all the criteria for
low-risk profile
EIOPA’s report on
proportionality
No EIOPA
Enhance quality,
consistency and
coordination of
insurance
supervision
across the EU,
and improve the
protection of
policyholders
and
beneficiaries,
including when
their insurer
fails
Number of deficiencies in quality of
supervision identified by EIOPA
EIOPA’s peer
review reports
Yes EIOPA
Number of questions received by EIOPA
which require a legal interpretation and of
those relating to the practical application or
implementation of Solvency II provisions on
group supervision101
EIOPA website Yes EIOPA
Number of international insurance groups
whose parent company is located in the EU
EIOPA register,
QRTs, market data
Partly EIOPA/NSAs
Share of European insurance groups’
premiums which are written outside the
home jurisdiction, and outside the EEA
EIOPA register,
QRTs, market data
Partly EIOPA/NSAs
Share of insurers’ premiums that are written
outside the home jurisdiction, per line of
business
QRTs, and other
national sources
Yes EIOPA/NSAs
Number of cross-border cases solved
following EIOPA’s recommendations
EIOPA report No EIOPA
Number of recovery plans drafted;
number of resolution plans drafted
Information from
NSAs
No EIOPA/NSAs
Number of winding up procedures Official Journal Yes Commission
Better address
the potential
build-up of
systemic risk in
the insurance
sector
Number of liquidity risk management plans
drafted
Information from
NSAs
No EIOPA/NSAs
Number of freezes of redemption options
approved by NSAs
Information from
NSAs
No EIOPA/NSAs
Number of firms subject to restrictions on
dividend distributions for financial stability
reasons
Information from
NSAs
No EIOPA/NSAs
101
In the meaning of Article 16b(5) and 16b(1) respectively of Regulation (EU) 1094/2010.
Page | 83
ANNEX 1: PROCEDURAL INFORMATION
1. LEAD DG, DECIDE PLANNING/CWP REFERENCES
This Impact Assessment Report was prepared by Directorate D "Bank, Insurance and
Financial Crime" of the Directorate General "Directorate-General for Financial Stability,
Financial Services and Capital Markets Union" (DG FISMA).
The Decide Planning reference of the “Review of measures on taking up and pursuit of
the insurance and reinsurance business (Solvency II)" is PLAN/2019/5384.
This initiative is part of the Commission’s 2021 Work Programme102
. Furthermore, parts
of the initiative represent actions proposed by the European Commission to implement
the European Green Deal103
and the new Capital Markets Union action plan104
.
2. ORGANISATION AND TIMING
Several services of the Commission with an interest in the initiative have been involved
in the development of this analysis.
Three Inter-Service Steering Group (ISSG) meetings, consisting of representatives from
various Directorates-General of the Commission, were held in 2020 and 2021.
The first meeting took place on 6 March 2020, attended by DG CLIMA, COMP, LS and
the Secretariat General (SG).
The second meeting was held on 21 January 2021. Representatives from DG CLIMA,
COMP, ECFIN, GROW, LS and SG were present.
The third meeting was held on 1 March 2021 and was attended by DG CLIMA, COMP,
ECFIN, ENER, GROW, MOVE and SG. This was the last meeting of the ISSG before
the submission to the Regulatory Scrutiny Board on 19 March 2021. The meetings were
chaired by SG.
DG FISMA has considered the comments made by DGs in the final version of the impact
assessment. In particular, it has clarified the links of this initiative with other initiatives
of the Commission as well as improved the coherence of this impact assessment with the
impact assessments for those other initiatives. FISMA also added information as regards
the specific impact on SMEs. The analysis of impacts and the preferred option takes
account of the views and input of different DGs.
3. CONSULTATION OF THE RSB
The Impact Assessment report was examined by the Regulatory Scrutiny Board on 21
April 2021. The Board gave a positive opinion on 23 April 2021 following which the
Commission made a few changes in order to address the Board’s request to further
develop the problem analysis and narrative in a consistent way. in the final version of the
Impact Assessment.
102
Commission Work Programme 2021: A Union of vitality in a world of fragility, COM(2020)690 final,
19 October 2020
103
Communication from the Commission on the European Green Deal, COM(2019)640 final, 11
December 2019
104
Communication from the Commission on a Capital Markets Union for people and businesses-new
action plan, COM(2020)590 final, 24 September 2020
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4. EVIDENCE, SOURCES AND QUALITY
The impact assessment draws on an extensive amount of desk research, meetings with
stakeholders, a public conference, an open public consultations, an external study and
opinions by EIOPA. The material used has been gathered since the Commission Services
started monitoring the implementation of the Solvency II in 2016. This material includes
but is not limited to the following:
 A public conference: “2020 Solvency II review: Challenges and opportunities”,
29 January 2020, Brussels;
 Technical reports from EIOPA (see box below);
 Seven (29/03/19, 30/09/19, 19/02/20, 26/05/20, 10/11/20, 16/12/20, 01/02/21)
(physical and virtual) meetings with Member State representatives in the Expert
Group on Banking, Payments, Insurance and Resolution to gather the views on
the revision of the Solvency II Directive;
 An Open online public consultation described in Annex 2, section 7;
 External study by Deloitte Belgium and CEPS for the Commission: Study on the
drivers of investments in equity by insurers and pension funds, December 2019;
 The JRC Technical Report on Insurance Guarantee Schemes.
Overview of EIOPA’s reports used for the purpose of this impact assessment.
Reports from EIOPA on certain aspects of the framework
Article 77f of the Solvency II Directive mandates EIOPA to report on an annual basis
(from 2016 to 1 January 2021) to the European Parliament, the Council and the
Commission about the impact of the applications of the so-called “long-term guarantee
measures”105
and the measures on equity risk106
.
EIOPA published such reports at the end of 2016, 2017, 2018, 2019 and 2020. They
provide statistical data per national market on the availability of long-term guarantees in
insurance products in each national market and the behaviour of insurers as long-term
investors, on the use of the “long-term guarantee measures” and of measures on equity
risk (number of firms applying each measure, the impact of each measure on the
solvency position of insurers). They also provide information on the effect of the use of
those measures on investment behaviours (including whether those measures provide
undue capital relief), on competition, on product offering, and on “phasing-in plans”
which should be adopted when an insurer does not comply with its capital requirements
without transitional measures.
Similarly, in order to feed into the Commission’s report on group supervision that were
to be submitted to the European Parliament and the European Council in accordance
with Article 242 of the Solvency II Directive, EIOPA submitted two reports on the
functioning of group supervision, supervisory cooperation and capital management
within insurance groups, in December 2017 and December 2018. Those reports listed a
number of issues (legal gaps and inconsistencies in supervisory practices) which could
hinder the effectiveness of group supervision. The 2018 report also identified several
105
Long-term guarantee measures are the measures that aim at mitigating volatility of the framework. They
include the volatility adjustment and the transitional measures applicable to the valuation of technical
provisions.
106
In particular, the symmetric adjustment on equity risk aiming to modulate the capital charge on equity
investments depending on the state of the financial markets, so that capital requirements increase when
stock markets are overheating and decrease when markets are plummeting
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challenges in relation to cross-border supervision.
In addition, at the request of the Commission, EIOPA published in December 2019 a
report on insurers’ asset and liability management in relation to the illiquidity of their
liabilities. This report provides information on insurance liabilities features (duration,
redemption options, etc.), asset management of insurers (and its interaction with
liabilities), the use of long-term guarantee measures and the market valuation of
insurance liabilities.
Finally, EIOPA published an Opinion on the harmonisation of recovery and resolution
frameworks for (re)insurers across the Member States in July 2017 and a discussion
paper on resolution funding and national insurance guarantee schemes, developing
potential principles for harmonisation, in July 2018. In this context, EIOPA also
conducted a survey on the existing regimes in the Member States.
Those information were used as input to the evaluation and the impact assessment.
EIOPA’s technical opinion on the review of the Solvency II Directive
On February 2019, the European Commission sent a request for technical advice to
EIOPA covering eighteen areas of the framework. The advice was requested for June
2020. However, in view of the Covid-19 crisis, the deadline for this advice was extended
to December 2020.
To support its work, EIOPA conducted two public consultations from mid-July to mid-
October 2019 on reporting and public disclosure and on insurance guarantee schemes
and a broader consultation on the other topics of the review from mid-October 2019 to
January 2020. EIOPA also published a general feedback statement on the outcome of
the consultation, as well as detailed resolution of stakeholders’ comments (including on
insurance guarantee schemes).
In addition, in order to quantify the impact of its proposals, EIOPA launched to requests
for data collection to insurance companies from March to June 2020 and from July to
September 2020.
EIOPA’s advice on the 2020 review of Solvency II was eventually submitted on 17
December 2020, comprising a main document, as well as annexes of more detailed
background analysis and comprehensive impact assessment at two different reference
dates aiming to capture the impact of the proposed changes under normal times (end of
2019) and under crisis situations (mid-2020).
EIOPA’s assessment is that the Solvency II framework is working well but that it needs
to remain fit for purpose. In EIOPA’s view, Solvency II needs to better reflect the low
interest rate environment and to recognise that insurers with long-term and illiquid
liabilities are particularly able to hold investments long-term. EIOPA’s overall approach
to the review has been therefore one of evolution not revolution aiming to address three
areas where improvements are deemed needed:
- Balanced update of the regulatory framework: EIOPA proposes changes in
several areas but which it considers balanced in terms of overall impact on
insurers;
- Recognition of the economic situation, in particular, the persistence of low
interest rates. EIOPA recommends revising the risk of interest rate changes;
- Regulatory toolbox completion, including better protection of policyholders via
macro-prudential tools, recovery and resolution measures and insurance
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guarantee schemes.
The material used to inform this impact assessment comes from reputable and well-
recognised sources that act as benchmarks and reference points for the topic. Findings
were cross-checked with results in different publications in order to avoid biases caused
by outliers in the data or vested interests by authors.
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ANNEX 2: STAKEHOLDER CONSULTATION
1. INTRODUCTION
As part of the Solvency II review, the European Commission will make legislative
proposals expected in the third quarter of 2021. The review is an opportunity to reflect
the current economic outlook, incorporate the political priorities of the European Union
(the European Green Deal and the Capital Markets Union) and finally to build on the
lessons learnt from the Covid-19 outbreak. Annex 2 aims to provide a summary of the
ongoing consultation activities that will be considered when the Commission will be
making its legislative proposal.
2. CONSULTATION STRATEGY
The consultation activities has fed into the European Commission’s review process of the
Solvency II framework. In order to collect the views of all stakeholders, the European
Commission has built its consultation strategy on the following components:
 A conference on the 2020 Solvency II Review: challenges and opportunities
bringing together the insurance industry, insurance associations, public
authorities, civil society;
 An Inception Impact Assessment for the review;
 A public consultation open to all stakeholder groups;
 Targeted consultations of Member States.
3. CONFERENCE ON SOLVENCY II
The European Commission organized a conference, which took place on 29 January
2020, with three keynote speeches and four panel debates focusing on the key challenges
for the insurance sector and the opportunities arising from the Solvency II review.
Amongst keynote speakers and panellists: representatives from the insurance industry,
insurance associations, national and EU authorities, civil society, and Members of the
European Parliament.
The panels concluded that:
 The current economic and financial conditions are not adequately reflected in the
prudential rules. There is a need to maintain a robust framework, while duly
considering the CMU priorities. There are different views on which areas to
review, but it is important to safeguard policyholder protection and to ensure that
the prudential framework does not influence insurance product design.
 There is a need to clarify the scope and the rules for the application of the
proportionality principle, improve legal certainty as well as achieve supervisory
convergence.
 It is essential to ensure supervisory convergence and coordination, proved by
several insurer failures operating cross-border. Panellists made several
recommendations aiming to achieve proper functioning of the internal market and
policyholder protection, while avoiding unnecessary costs for EU insurers.
 The insurance sector is exposed to emerging risks associated with climate change
and new technologies. The new Climate Adaptation strategy aims to increase
insurance penetration for climate risks. In addition, new technological innovation
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creates challenges as well as opportunities for growth and enhanced
competitiveness in the global market.
In the concluding remarks, the Commission services invited stakeholders to provide their
views through the Public Consultation, which would complement EIOPA’s technical
advice and would be duly considered in the Commission’s legislative proposal.
4. INCEPTION IMPACT ASSESSMENT
The Inception Impact Assessment aims to provide a detailed analysis on the actions to be
taken at the EU level and the potential impact of different policy options on the economy,
the society and the environment. In this context, the Commission ran an extended
feedback period from 1 July to 26 August 2020, which was initially planned for four
weeks. The Commission received twelve feedback responses across different stakeholder
groups: insurance industry (six), public authorities (three), civil society (two), and
academia (1).
Priorities of the Solvency II Review
Respondents acknowledged the need for a review but agreed on the fact that Solvency II
has worked well to date, especially in the light of Brexit and the Covid-19 crisis.
However, a few respondents focused on the need to find the balance between (i) financial
stability and prudence and (ii) efficiency and growth. All respondents supported the
objectives of the Solvency II review: ensuring policyholder protection, preserving
financial stability and promoting fair and stable markets. A respondent highlighted the
need to keep policyholder and beneficiaries protection as a top priority. In addition, some
respondents also pointed out the consideration of international competitiveness in the
Solvency II review and the need to keep a “risk-based” framework. Finally, the
respondent from the academia underlined the necessity to reflect international financial
accounting and IAIS developments in the review, as well as considering technology-
related and ethical risks.
Long termism and sustainability
All respondents underlined the need to preserve the insurance industry’s ability to
contribute to the long-term financing and investment and the continuation of long-term
product offering. Some respondents from the public authorities, insurance industry and
academia supported that the ability to provide long-term guarantees should be a priority
in order to serve consumers and set for the growth of the internal market. Moreover, the
insurance industry called for a reduction to overall capital requirements to facilitate the
insurance industry’s contribution to the political objectives of the EU. In contrast, a
public authority suggested that it is controversial to introduce political objectives in a
prudential framework. All respondents agreed that the prudential framework should
incentivize sustainable investment, while the insurance industry clarified that the
incentives should be limited to the extent that Economic, Social and Governance (ESG)
factors affect the insurer’s risk profile.
Volatility and proportionality
The insurance industry underlined the necessity to better mitigate undue volatility to
provide the right incentives (for long-term guarantee products and financing) and limit
fire sales of assets, especially in the context of the low interest rate environment.
Respondents called for a better application of the proportionality principle. The insurance
industry supported the extension of the proportionality principle thresholds to avoid
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unnecessary cost and barriers. Mainly public authorities and the civil society, as well as
some representatives from the insurance industry called for a consistent application of the
proportionality principle to ensure the level-playing field. A respondent from the
academia was against extending thresholds, since it is contradicting the harmonization
objective at EU level.
Recovery, resolution, IGS, group supervision and cross-border supervision
Some respondents (mainly public authorities, civil society and academia) highlighted the
need for improving harmonization of IGS to contribute to financial stability and ensure
level-playing field. The insurance industry mainly supported that IGS and recovery and
resolution should remain unchanged. A public authority pointed out that insurance
recovery, resolution and IGS potentially lead to unnecessary high compliance costs.
In regards to cross-border supervision, all stakeholder categories pointed out towards a
better coordination and information exchange between Home and Host supervisors.
Some representatives from the insurance industry called for amendments to prudential
rules in order to prevent regulatory and supervisory arbitrage.
Finally, one stakeholder recommended that the Solvency II Review should put more
emphasize on group supervisions issues, and to reflect international developments in
relation to systemic risks in the insurance sector (“Holistic framework” by the
International Association of Insurance Supervisors).
5. PUBLIC CONSULTATION
The Commission launched a public consultation to obtain stakeholder views on the
review of the Solvency II Directive. The feedback period ran from 1 July 2020 to 21
October 2020. The consultation received 73 responses from a variety of stakeholders
representing the insurance industry (56%), civil society (14%) and public authorities
(11%). Most respondents were stakeholders from the European Economic Area. The
Commission services published a “summary report” on the feedback to this consultation
on 1 February 2021107
. A summary for the four topics of the public consultation results
on the Solvency II Review is provided below. Please note that those who did not provide
a view were not considered in the analysis of answers.
Long-termism and sustainability of insurers’ activities and priorities of the
European framework
5.1.1. Priorities of Solvency II and of the review
Respondents overall supported the three main objectives of the Solvency II: policyholder
protection (top priority), financial stability, and fair and stable markets. Regarding the
priorities of the Solvency II review, stakeholders were split. The most important
priorities for the civil society and the public authorities were solvency, policyholder
protection, and prevention of systemic risk. The insurance industry considered as very
important the facilitation of long-term guarantee products and long-term and sustainable
investments.
107
Available at the following link: https://ec.europa.eu/info/law/better-regulation/have-your-
say/initiatives/12461-Review-of-measures-on-taking-up-and-pursuit-of-the-insurance-and-reinsurance-
business-Solvency-II-/public-consultation
Page | 90
5.1.2. Long termism and sustainability
The majority of respondents who provided a view (87%) supported that the current
treatment for equity and debt investments is not appropriate and stressed the necessity for
re-assessing the risk margin, the criteria for long term equity and calibration of equity.
Furthermore, most public authorities supported that framework gives the right incentives
to provide long-term debt financing, while the insurance industry largely disagreed.
Regarding the incentives for increasing sustainable investment and financing of SMEs
under current rules, the insurance industry (78%) called for a better treatment, while the
public authorities opposed it. In terms of preferential treatment for “green” investments,
all stakeholder groups were mainly against it (60%). Finally, both public authorities and
the insurance industry (78%) largely opposed the introduction of a brown-penalizing
factor, while the civil society mainly supported it (80%).
5.1.3. Volatility, procyclicality and lessons learnt from the Covid-19 crisis
The insurance industry called for a review of the volatility adjustment and risk margin,
and largely considered that the framework does not appropriately mitigate volatility
(88%) and generates procyclical behaviours (65%). Public authorities were divided on
the matter, while 70% of the civil society did not have a view.
In the context of the Covid-19 crisis, only a few participants identified new issues in
relation to prudential rules, mainly public authorities. The answers received underlined
the need to address short-term excessive volatility and also expressed that Solvency II
does not provide enough possibilities for creating short-term crisis operational reliefs.
Finally, some respondents suggested that the crisis revealed underestimation of interest
rate risk and of correlation between underwriting and market risks.
5.1.4. Risk shifting to policyholders and impact of Solvency II
All stakeholder groups that expressed a view mentioned that Solvency II provides
incentives for risk shifting to policyholders. In fact, stakeholders representing the civil
society that had a view (75%) supported disincentivising life insurance guaranteed
products in order to preserve financial stability. In contrast, the insurance industry and
the public authorities opposed it and stressed the importance for product design freedom
and sound risk management.
Proportionality of the European framework and transparency towards the
public
5.2.1. Proportionality
Participants indicated that Solvency II imposes operational burden, complexity and cost
to small insurers, with the majority of insurers who provided a view (70%) supporting
the extension of the thresholds of exclusion from Solvency II. Public authorities and the
civil society had mixed views on the matter, claiming that extending the scope of
proportionality could potentially undermine policyholder protection and would
negatively affect the level-playing field. Public authorities (67%) and the civil society
(80%) mainly supported a potential preferential treatment of mutual insurers, while the
insurance industry had mixed views. Finally, public authorities (71%) were the only
stakeholder group opposing less discretion in applying proportionality by supervisory
authorities.
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The insurance industry (77%) was against imposing requirements for internal models
users to calculate their solvency capital requirements under the standard formula,
explaining that such a requirement would be burdensome and could create doubts on the
credibility of internal models. The civil society was in favour claiming that it would
enhance comparability and the level-playing field. Public authorities were either
supporting the requirement but only for supervisory reporting or not supporting it at all.
5.2.2. Supervisory reporting and public disclosure
The insurance industry supported the inclusion of more automatic criteria for granting
exemptions and limitations in supervisory reporting. In fact, some suggested to follow a
risk-based approach with some supervisory discretion, rather than a size-based approach.
The civil society was split of the matter, with the majority supporting automatic criteria
with no discretion. The public authorities were split as to whether or not the status quo
should be preserved. Some stakeholders pointed out the need to achieve consistent
policyholder protection across EU, by introducing clear-cut criteria. Regarding the
solvency and financial condition report (SFCR), participants pointed out the need to
consider the audience, since it can be very complex, detailed and technical, especially for
policyholders. Some respondents also suggested to reduce the length of the report as well
as increase visibility of SFCR in insurers’ website.
Improving trust and deepening the Single Market in insurance services
5.3.1. Cross-border supervision
The civil society (83%) supported enhanced safeguard powers of intervention by host
authorities when needed, while the insurance industry and public authorities were divided
on the matter. Some suggestions for additional powers include restrictive measures on
product offering subject to some conditions, enhanced coordination between Host
authorities, Home authorities and EIOPA and establishment of a specific “early warning
alert system” for entities established in one member state but mainly operating in others.
Finally, most participants (81%) supported cross-border supervision by national
authorities with EU coordination where appropriate.
5.3.2. Recovery, resolution, and Insurance Guarantee Schemes
The insurance industry had confidence in insurers’ and public authorities’ preparedness
in case of an adverse event (72%), while public authorities and the civil society (73%)
had doubts on the matter. Some participants pointed out the need to have a harmonised
recovery and resolution framework and proportionate application of the rules. In total,
views on the need for EU action on IGS were rather split among respondents with 39%
supporting it and 43% seeing no reason for it. Public authorities and the insurance
industry were mainly against (62%) a mandatory setup of IGS, having concerns for the
differences across countries that would affect the design and funding of IGS. However, a
quarter of the industry respondents, notably several national insurance associations,
supported action on IGSs. The civil society was largely in favour (75%), supporting that
IGS would enhance policyholder protection and would strengthen the Single Market.
Respondents agreed that the main role of IGS should be consistent policyholder
protection across the EU and considered that compensation and continuation depends on
the type of claim and policy. Finally, civil society was mainly supportive of a
harmonized minimum level of protection by IGS (87.5%), while the two other
stakeholder groups mainly opposed it (69%).
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5.3.3. Macro-prudential tools in Solvency II
Public authorities and the civil society were mainly in favour for providing authorities
with the power to temporarily prohibit redemptions, but only when an insurer is in
financial distress. The insurance industry was also supportive but there were mixed views
as to under which situations the powers should be exercised. The majority of respondents
supported providing public authorities with power to reduce entitlements of insurer’s
clients, but only as a last resort measure. Participants also acknowledged the necessity to
strengthen macro-prudential supervision in Solvency II but only in certain areas, while
the insurance industry supported to limit the measures only to the areas covered by the
Commission’s call for advice, as going further that those areas would jeopardize the
international competitiveness of the European insurance industry in their view.
Moreover, the civil society was the only stakeholder group supporting regulatory
flexibility in adverse events. Some recommendations included removing eligibility limits
on lower-quality capital, providing reporting flexibility and recalibrating requirements
during crises.
New emerging risks and opportunities
5.4.1. European Green Deal and sustainability risk
The civil society deemed as very important the requirement for climate scenario analyses
as part of the risk management and governance requirements (“Pillar 2”) rules. Public
authorities were also supportive but gave various levels of importance, while only a few
insurance stakeholders supported that climate scenario analyses are of high or medium
importance. Some recommendations included lowering the risk margin and capital
requirements for long term investments and strengthening insurers’ advisory role towards
clients in regards to climate resilience and adaptation.
5.4.2. Digitalisation and other issues
The insurance industry was mainly against having additional requirements for monitoring
ICT risks (80%), as part of the prudential framework. The civil society was mainly in
favour (86%), by pointing out the need to reflect those risks given the current outlook of
digitization and the increasing threat of cyber-attacks. Furthermore, the insurance
industry was against having cyber insurance as a distinct class, while the public
authorities were in favour (75%).
5.4.3. Group-related issues
The insurance industry mainly supported (86%) providing lighter requirements for intra-
groups and distinguishing between intra-group and extra-group outsourcing, but subject
to additional criteria. Some recommendations on the additional criteria include taking
into account proportionality, risk exposure and the need for clear harmonized criteria.
Public authorities largely opposed this proposal (86%), while the civil society had mixed
views, with the majority opposing the proposal. The majority of participants (80%)
thought it is unacceptable that group supervision waives solo supervision in certain
circumstances.
Additional or late feedback to the consultation
Stakeholders were offered the opportunity to make an attachment to their contribution, in
order to cover any topic or provide any complementary information that they would
deem useful. 31 stakeholders provided such inputs. Most of them aimed at expanding or
Page | 93
clarifying the stakeholder’s point of view on certain areas of the consultation. Some
contributions, mainly from stakeholders classified as “other businesses” (non-insurance
related), also touched upon additional topics not covered by the consultation document.
However, each of those specific issues was only raised by a couple of participants to the
public consultation. Those topics include, although not limited to, the following:
 group supervision issues, including the prudential treatment of insurance
subsidiaries headquartered in third countries, and the generalization of the use and
disclosure of Legal Identity Identifiers;
 market access of third country companies which exclusively conduct reinsurance
activities;
 the prudential treatment of derivatives, securitisation, exposures to central
counterparties, and credit and suretyship insurance business;
 the definition of the insurance business in view of financial innovations.
Two additional feedbacks, from a non-governmental organisation (NGO) and the
European Systemic Risk Board (ESRB) were received in the context of the public
consultation. An analysis for the two individual responses is presented below, while it is
important to highlight that the answers were not included in the statistics of the Public
Consultation.
The feedback received from the ESRB focused on macro prudential considerations,
recovery and resolution, as well as appropriate reflection of risk in the prudential
framework. For better reflecting macro prudential considerations, the ESRB provided
recommendations for introducing three types of tools to the framework: solvency tools,
liquidity tools and tools for addressing risks from financing the economy. In addition, the
ESRB called for a harmonized recovery and resolution framework across the EU and
improved harmonization of the IGS. In order to ensure that risks are reflected properly in
the Solvency II, the ESRB recommended to adjust the risk-free rate term structure to
better reflect the current low interest rate environment. In the context of the Covid-19
crisis, ESRB called for coordinated responses during crises, highlighted the need for a
capital buffer, called for a reflection of volatility in insurers’ solvency ratios and finally
stressed the need for a better monitoring of liquidity and supervisory intervention.
The feedback received from the NGO is mainly in line with the views provided to the
public consultation by the civil society. The respondent opposed preferential treatment
for “green investments” and highlighted the need to reflect the current low interest rate
environment, while opposing the offering of guaranteed products. In addition, the
participant supported considering the audience when preparing the SFCR and providing a
shorter and simpler version for policyholders. Regarding the IGS, the respondent was in
favour of minimum harmonization and at the same time considering the national
differences between member states and also pointed out the need for better recovery and
resolution. Finally, the respondent acknowledged the need to reflect IT risks in insurers’
management practices.
6. TARGETED CONSULTATIONS OF MEMBER STATES
The Commission services discussed the different aspects of the review of Solvency II
during several Expert group meetings with Member States on Insurance matters:
 On 29 March 2019, Member States were consulted on the overall scope and
process of the review
 On 30 September 2019, there was an exchange of views between EIOPA and
Member States about EIOPA’s draft consultation document. Member States were
Page | 94
also asked to provide feedback on the Commission’s finding in its report on
group supervision which was published in June 2019
 On 19 February 2020, Member States were invited to comment on the European
Commission’s consultation strategy, but also EIOPA’s approach to the impact
assessment of its proposals. A specific debate took place on the Commission’s
approach in relation to recovery and resolution and to insurance guarantee
schemes.
 On 26 May 2020, Member States were asked whether the Covid-19 outbreak
required urgent changes to the framework, ahead of the Solvency II review. The
majority view was that the situation of the insurance sector appeared so far stable
and under control and that quick fixes were not needed. However, it was agreed
that a careful monitoring of market developments would be needed in close
cooperation with EIOPA.
 On 10 November 2020, the Commission services asked feedback to Member
States about the priorities of the review, including the main problem that the
initiative should aim to tackle and the objectives of the review of Solvency II. In
addition, the European Commission shared the preliminary results of the feedback
to its public consultation, which was followed by a debate. The European
Commission also consulted the Member States on specific elements related to
recovery and resolution.
 On 16 December 2020, the Commission services invited Member States to
provide their views on the possible technical features for insurance guarantee
schemes
 Finally, on 1 February 2021, the Commission services invited Member States to
provide their views on the main components of EIOPA’s advice: The Capital
Markets Union and the Sustainable Finance Strategy, risk sensitivity and
volatility, proportionality, quality of supervision and finally systemic risks.
In addition, Member States were consulted specifically on recovery and resolution and on
IGS items through a targeted survey that was circulated following the 19 February 2020
meeting. Member States were also asked to complete a template on the design and
funding of existing IGS schemes following the 16 December 2020 meeting.
The input provided by Member States has been integrated throughout the impact
assessment.
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ANNEX 3: WHO IS AFFECTED AND HOW?
1. PRACTICAL IMPLICATIONS OF THE INITIATIVE
The objective of this Annex is to set out the practical implications for the main
stakeholders affected by this initiative, mainly the insurance sector and their
shareholders, supervisory authorities and consumers. The initiative aims to
simultaneously address the following problems:
 Problem 1: Limited incentives for insurers to contribute to the long-term
financing and the greening of the European economy
 Problem 2: Insufficient risk sensitivity and limited ability of the framework to
mitigate volatility of insurers’ solvency position
 Problem 3: Insufficient proportionality of the current prudential rules generating
unnecessary administrative and compliance costs
 Problem 4: Deficiencies in the supervision of (cross-border) insurance companies
and groups, and inadequate protection of policyholders against insurers’ failures
 Problem 5: Limited specific supervisory tools to address the potential build-up of
systemic risk in the insurance sector
In order to address the issue of limited incentives for insurers to contribute to the
long-term financing and the greening of the European economy (Problem 1), the
preferred options are to facilitate long-term investments in equity by revising the
eligibility criteria of the existing regulatory asset class for long-term equity investments
(Option 2) and to strengthen “Pillar 2” requirements in relation to climate change and
sustainability risks (Option 4) without changing capital requirements depending on the
green/brown nature of investments.
Insurers and their shareholders would benefit from those options, as insurance companies
by being allowed to take additional risks (i.e. investing more in equity) with limited
impact on capital requirements, would be in a position to generate a higher return on
investments to their shareholders at limited additional costs. They would be also
incentivised to better integrate climate change and sustainability risks in their investment
and underwriting practices, which increases compliance costs but strengthens the risk
management system of insurance companies. Also, in the long run, insurance companies
and their shareholders would benefit from this enhanced monitoring and management of
sustainability risks. Even in the short run, the implementation costs of those options (both
one-off and ongoing) would be moderate.
Policyholders would also benefit from a higher level of protection due to better
management of environmental and climate risks in insurers’ investment and underwriting
activities. This means that the risk of insurance failure due to those risks would be
reduced. They may be more exposed to the likely increase risk-taking by insurance
companies as a result of the changes on the treatment of equities108
, but they would also
benefit from such a change in investment strategy through the possibility for insurance
companies to provide higher returns through profit-sharing mechanisms with
policyholders.
Supervisors would also benefit from clearer and less complex rules in relation to both
equity and climate change risks.
108
This risk is however limited as the criteria would be framed broadly in line with EIOPA’s advice, which
guarantees a prudent approach.
Page | 96
Finally, businesses, in particular SMEs and those conducting green activities, would
benefit from easier access to funding by insurance companies thanks to those options, as
the prudential framework would be more conducive of long term investments, while at
the same time ensuring that insurers appropriately capture the longer-term risks of
climate change.
Next to this, the overall society welfare could increase in case the proposed options
would result in a significant change in insurers investment activities in the directions
envisaged. In this case, both the economy would grow stronger and negative effects on
the environment by investments by insurers would be mitigated. Clearly, in case
insurance companies would make too risky equity investments this could undermine
policyholder protection and also possibly financial stability.
In order to address the issue of insufficient risk sensitivity and limited ability of the
framework to mitigate volatility of insurers’ solvency position (Problem 2), the
preferred option is to address issues of risk sensitivity and volatility while balancing the
cumulative effect (on capital requirements) of the changes (Option 3). This implies in
particular better reflecting the low-interest rates environment in capital requirements and
in the valuation of insurers’ long-term liabilities towards policyholders, but also ensuring
that the mechanisms aiming to mitigate volatility (notably the volatility adjustment) are
fit for purpose. However, in order to ensure that the overall impact of those changes
remains balanced (and does not become market disruptive), the changes would be only
progressively implemented over time (phasing-in periods) and the changes affecting
insurer’s capital ratio negatively would be compensated by additional changes which
would have a positive effect on insurers’ solvency ratio, notably the reduction of the cost-
of-capital rate underlying the risk margin calculation from 6% to 5%. Overall, the
implementation of Option 3 would lead to an increase in capital surplus.
The implementation of Option 3 would largely benefit policyholders, as insurers would
more appropriately capture in capital requirements a material risk to which they are
exposed and which is currently underestimated under standard formula capital
requirements. They would also benefit from the reduced volatility of the framework, as
insurers would be in a better position to offer products with guarantees and less
incentives to simply shift market risks to policyholders. The improved mitigation of
volatility is also contributing to insurers’ international competitiveness which can follow
a longer-term approach when making decisions of international expansion.
Option 3 would also benefit insurers, thanks to the mitigated volatility and the greater
ability to make long-term decisions. Obviously, the tightening of rules in relation to
interest rates (although partly compensated) would be a cost for insurers’ shareholders.
However, this cost remains moderate and justified by the need to better capture a material
macroeconomic risk to which insurers are exposed. In addition, they would be given time
to implement those changes due to the introduction of a phasing-in. Finally, there would
be implementation costs as the new framework would be more complex than under
current rules. However, the additional level of complexity stemming from Option 3 is
such that it tries to strike a balance between the need to improve the technical robustness
of the framework and the objective of avoiding excessive complexity of prudential rules.
Finally, Option 3 would affect supervisors as they would have to ensure that insurers
comply with a more complex framework. In addition, during the phasing-in period, they
would have to carry out additional monitoring activities in order to ensure that insurers
are managing the risks stemming from the low-yield environment even if not fully
integrated in capital requirements in the short run.
Page | 97
In order to address the issue of insufficient proportionality of the current prudential
rules generating unnecessary administrative and compliance costs (Problem 3), the
preferred option is to 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 (Option 3). Concretely speaking, the threshold of exclusion from Solvency II
in relation to volume of business activities would be multiplied by two as proposed by
EIOPA (from € 25 million to € 50 million), but the threshold in relation to revenues
would be multiplied by three and not by five as proposed by EIOPA (from € 5 million to
€ 15 million). In addition, the eligibility criteria for classification as “low-risk profile
insurer” would be slightly less strict than under EIOPA’s proposals with the aim of
allowing more firms to automatically benefit from a list of proportionality measures,
which would also be slightly extended compared to what EIOPA proposed (notably in
relation to public disclosure requirements).
Option 3 would generate material reduction in compliance costs for the estimated 186
insurance companies which would no longer be subject to Solvency II. Unless they want
to benefit from the “passporting” or they are required to comply with Solvency II under
national law, they would not be required to comply with any Solvency II requirement
which would generate a reduction of 2.2% of operating costs. Obviously, this benefit
would be partly compensated by the cost of implementing national prudential rules
(including the one-off cost of changing IT systems and the sunk costs of developing
systems to comply with Solvency II), which cannot be quantified. In addition, at least
249 insurers would be classified as low-risk profile and as such would benefit from
automatic proportionate rules. For those firms, this would result in an immediate benefit
and reduction of compliance costs, which cannot be clearly quantified although it can be
estimated to be above 0.2% of total operating expenses, taking into account the reduced
frequency of submission of narrative reporting to supervisors.
Policyholders could benefit from the reduced compliance costs as it would imply higher
ability for insurers to innovate and supply policyholders with a well-diversified range of
insurance products. Shareholders might benefit from higher profits. The reduced level of
public disclosure for insurers that are low-risk profile would imply lower transparency
towards specialised stakeholders (financial market participants, analysts). However, the
insurers concerned would still represent a minor share of total insurers’ liabilities towards
policyholders (0.06%) or insurers’ revenues (0.07%). Therefore, the loss of information
is expected to have a limited impact.
For supervisors, Option 3 would imply that additional insurers would be subject to
national prudential rules, which means that supervisory authorities would have to
maintain competencies so that supervisors have knowledge on both Solvency II rules and
national prudential rules. Solvency II supervisors would also have to adapt from less
frequent of regular supervisory reports and own risk and solvency assessment reports by
low-risk profile insurers which would reduce the information received to exercise
ongoing supervision. In addition, in the short run, supervisors would receive and have to
process a high number of notifications from insurers that want to be classified as low-risk
profile and indicate which proportionality measures they intend to use, which represents
a material one-off cost. Finally, EIOPA would also receive less information (as insurers
excluded from Solvency II would no longer report in accordance with the Solvency II
quantitative reporting templates). However, this should have limited impact on EIOPA’s
ability to monitor market trends and the arising of systemic risk in the insurance sector
due to the very limited market shared that the excluded insurers would represent.
Page | 98
In order to address the issue of deficiencies in the supervision of (cross-border)
insurance companies and groups, and inadequate protection of policyholders
against insurers’ failures (Problem 4), the preferred options are to improve the quality
of supervision by strengthening or clarifying rules on certain aspects, in particular in
relation to cross-border and to group supervision (Option 2), to introduce minimum
harmonising rules to ensure that insurance failures can be better averted or managed in an
orderly manner (Option 3) and to introduce minimum harmonising rules to protect
policyholders in the event of an insurer’s failure (Option 4).
The main beneficiaries would be policyholders. Option 2 would ensure that the quality
and consistency of supervision, including for cross-border insurers, is improved, while
Options 3 and 4 would ensure that the (near-)failure of an insurer is appropriately
managed and that policyholders are protected in case an insurer fails. More precisely, the
(further) harmonised recovery and resolution framework would contribute to reducing
the negative social and welfare impact of an insurer’s failure. The minimum
harmonisation of IGSs would not only safeguard the confidence of consumers in the
Single Market but would also contribute to market discipline, as the insurance guarantee
scheme of the Home Member State of the failing insurer would be used to compensate
policyholders of that insurer. Progressive ex-ante funding of IGSs (over a 10-year period)
would imply a maximum annual contribution of around 0.233% of gross written
premiums by each contributing policyholder (i.e. about EUR 2.33 per yearly policy of
EUR 1000) which appears to be, in absolute terms, a moderate cost to ensure an adequate
level of protection in case of insurance failure109
.
Insurers would also benefit from clearer rules and improved level-playing field stemming
from those options. They would also be better prepared to react to a deterioration in their
solvency position. The ex-ante funding of IGS would have a capital cost, which, in
absolute terms, appears to be moderate – the Commission services estimate it to be
0.12% of annual premiums110
.
Finally, supervisors would benefit from those changes, with more legal clarity and a
better preparedness for insurers’ financial distress. On the other hand, the enhanced
quality of cross-border supervision and the new planning requirements imply that
supervisory authorities allocate sufficient resources to such new activities, although those
additional costs remain contained.
Finally, in order to address the issue of limited specific supervisory tools to address
the potential build-up of systemic risk in the insurance sector (Problem 5), the
preferred option is to make targeted amendments to prevent financial stability risks in the
insurance sector (Option 2). More concretely, supervisors would be granted new
supervisory powers and insurers would have to comply with some new requirements
aiming to prevent the build-up of systemic risks stemming from or amplified by the
insurance sector, which could be detrimental to financial stability. This would include in
particular ensuring that insurers better incorporate macro-prudential considerations in
their investment and risk management activities, enhancing liquidity requirements on
insurers and introducing the power for supervisors to temporarily freeze redemption
rights on life policies, aligning prudential rules on loan origination with the banking
sector, and granting supervisors the possibility to suspend or restrict dividend
distributions of specific firms in exceptional situations for financial stability reasons.
109
See Annex 5 for the assumptions underlying the estimation of costs.
110
Assuming a cost-of-capital rate of 5% as suggested in Section 6.2 of the impact assessment.
Page | 99
Policyholders would benefit as improved financial stability would have no direct effect
on policyholder protection in the short run but could benefit them in the long run as the
risk of insurance failures would decline. In addition, financial instability risks and
possible spill-over effects on the real economy could affect policyholders both as
taxpayers (since business failures and economic recession may require public
intervention) and as workers (since EIOPA demonstrates that there is a correlation
between financial instability and unemployment). In addition, while some of the tools
embedded in Option 2 may seem harmful to policyholders in the short term if used (e.g.
the power for NSAs to freeze the exercise of surrender options on life insurance contracts
), they would be a last resort measure to avoid the failure of an insurer, which may result
in financial losses for policyholders in the longer run.
Option 2 would have a cost for insurers’ shareholders because of the possibility of
dividend restrictions in exceptional situations. However as such restrictions may
strengthen the solvency position of insurers and thus their probability of survival,
shareholders would benefit from those measures in the medium term. Similarly, insurers
conducting banking-type loan origination activities may face a slight increase in capital
requirements due to a convergence with banking rules but this might benefit the economy
as the risk of not adequately regulated shadow banking is reduced. Also, insurers would
be less prone to liquidity risks, both because they would be required to better plan for
liquidity risk and due to the last-resort possibility to freeze redemption rights. Of course,
liquidity planning is an additional compliance cost, but this cost is supposed to be limited
as insurers are already expected to monitor and manage liquidity risk as part of the own
risk and solvency assessment (ORSA). The other implementation costs in relation to the
enhanced risk management and reporting system are also expected to be moderate as a
number of insurers already embed such requirements in their processes, and the costs for
those which do not apply it yet would remain limited.
Finally, Option 2 would also strengthen the power and duties of supervisory authorities
in relation to financial stability. This slight increase in supervisory costs is fully justified
by the fact that preserving financial stability is an explicit objective of the Solvency II
framework, and generates overall welfare gain (when compared with a counterfactual
financial stability crisis).
The following tables summarize the impact of the different preferred options.
Page | 100
Summary of winners and losers
Insurers Policyholders
Supervisory
authorities
Baseline: Do nothing 0 0 0
Limited incentives for insurers to contribute to the long-term financing and the greening
of the European economy
Option 2: Facilitate long-term investments in
equity
++ +/- +
Option 4: Strengthen “Pillar 2” requirements
in relation to climate change and
sustainability risks
- +++ +
Insufficient risk sensitivity and limited ability of the framework to mitigate volatility of
the solvency position of insurance companies
Option 3: Address issues of risk sensitivity
and volatility while balancing the cumulative
effect of the changes
+ ++ -
Insufficient proportionality of the current prudential rules generating unnecessary
administrative and compliance costs for small and less complex insurers
Option 3: Give priority to enhancing the
proportionality principle within Solvency II
and make a smaller change to the exclusion
thresholds.
++ - -
Deficiencies in the supervision of (cross-border) insurance companies and groups, and
inadequate protection of policyholders against insurers’ failures
Option 2: Improve the quality of supervision
by strengthening or clarifying rules on certain
aspects, in particular in relation to cross-
border supervision
+/- ++ +/-
Option 3: Introduce minimum harmonising
rules to ensure that insurance failures can be
better averted or managed in an orderly
manner.
+/- ++ +
Option 4: Introduce minimum harmonising
rules to protect policyholder in the event of an
insurer’s failure
- +++ 0
Limited specific supervisory tools to address the potential build-up of systemic risk in
the insurance sector
Option 2: make targeted amendments to
prevent financial stability risks in the
insurance sector
+/- + +/-
Page | 101
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
LT
green
financin
g
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Finan-
cial
stability
Baseline: Do nothing 0 0 0 0 0 0 0 --
Limited incentives for insurers to contribute to the long-term financing and the greening of the European economy
Option 2: Facilitate long-term investments in equity ++ - - 0 + - ++ ++
Option 4: Strengthen “Pillar 2” requirements in relation to
climate change and sustainability risks
+ 0 0 0 + ++ + ++
Insufficient risk sensitivity and limited ability of the framework to mitigate volatility of the solvency position of insurance companies
Option 3: Address issues of risk sensitivity and volatility while
balancing the cumulative effect of the changes
+++ ++ +++ - - ++ ++ ++
Insufficient proportionality of the current prudential rules generating unnecessary administrative and compliance costs for small and less complex insurers
Option 3: Give priority to enhancing the proportionality principle
within Solvency II and make a smaller change to the exclusion
thresholds.
0 0 0 +++ - - ++ +
Deficiencies in the supervision of (cross-border) insurance companies and groups, and inadequate protection of policyholders against insurers’ failures
Option 2: Improve the quality of supervision by strengthening or
clarifying rules on certain aspects, in particular in relation to
cross-border supervision
+ + 0 0 ++ + ++ ++
Option 3: Introduce minimum harmonising rules to ensure that
insurance failures can be better averted or managed in an orderly
manner.
0 0 0 + ++ ++ ++ ++
Option 4: Introduce minimum harmonising rules to protect
policyholder in the event of an insurer’s failure
+ 0 0 0 +++ + ++ ++
Limited specific supervisory tools to address the potential build-up of systemic risk in the insurance sector
Option 2: make targeted amendments to prevent financial
stability risks in the insurance sector
- + 0 +/- -- ++ + ++
Page | 102
2. SUMMARY OF COSTS AND BENEFITS OF THE COMBINED SET OF OPTIONS
I. Overview of Benefits (total for all provisions) – Preferred Combination of Options
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, and by mitigating insurers’ volatility in solvency ratio, the review would incentivise
long-termism in underwriting and investment decisions. Insurers would 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.
In addition, as the changes which would result in stricter capital requirements (changes on
interest rates) would only be progressively implemented (phasing in), in the first years of
implementation of the review, up to EUR 90 billion of capital resources in excess of capital
requirements would be released in the short-term compared to current rules. This could help
insurers’ contribute to the economic recovery.
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).
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.
Page | 103
International
competitiveness is
preserved or even
improved
This benefit is driven by several factors:
- Better reflection of insurers’ long term business model which facilitates long-termism in
investment decisions (reduced capital charges on long-term equity investments) and
underwriting activities (better mitigation of the impact of short-term volatility.
- Taking into account the temporary impact of the phasing of changes on interest rates, the
insurance sector would start with an increase in capital resources in excess of capital
requirements of up to EUR 90 billion compared to capital resources under current rules
right after the review (assuming similar economic conditions as at the end of Q2/2020).
While the sector’s capital resources would increase during the most important period for
the post-Covid economic recovery, this increase in capital resources would reduce during
every year of the phasing in period. At the end of the phasing in period, the preferred
recommendations would still maintain an estimated increase in capital resources by EUR
30 billion at EU level in an economic environment similar to that at end of Q4/2019. If
the economic environment is similar to that at the end of Q2/2020, FISMA’s proposal
would lead to an increase in capital resources of EUR 16 billion at the end of the phasing
in period (to be compared with a decrease by EUR 55 billion under EIOPA’s advice).
- By strengthening more macro-prudential requirements without imposing undue capital
burden (e.g. no supervisory power to impose capital surcharge for systemic risk) insurers
would be better prepared to cope with the next financial crises.
Insurers would be the main recipients of this
benefit. This also contributes to
Enhanced
policyholder
protection
This is achieved through the following:
- 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
- Clearer and more effective rules on group supervision
- Higher quality of supervision, and better coordination by EIOPA
- Reduced likelihood of insurers’ 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.
- Reduced losses in social welfare stemming from the failure of an insurer: the default of
insurance companies can expose policyholders to substantial social and financial
hardship due to the discontinuation of their policies and the resulting absence of
protection. These effects would be mitigated through a minimum harmonised recovery
and resolution framework. Complemented by the implementation of a minimum
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.
Page | 104
harmonisation of IGS across the EU, the framework 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.
- In relation to macro-prudential tools, the greater focus on macroprudential concerns in
underwriting and risk management activities, and on liquidity risks, would reduce
incentives for excessive risk taking by insurers and therefore contribute to policyholder
protection.
Enhanced level-
playing field and
improved
competition within
the Single Market
for insurance
services
This is achieved through the following:
- More consistency in supervision through clearer rules which are applied more
consistently in the different Member States.
- Reduction in undue regulatory burden: The high cost of compliance of Solvency II 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.
- Rules on group supervision would also ensure that non-EEA groups operating in
Europe are not put at a competitive advantage by circumventing Solvency II rules on
group supervision.
- In relation to recovery and resolution, 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. In addition, the
harmonisation of the geographical scope of IGSs would also eliminate overlaps of
existing IGSs as well as the associated costs.
Policyholders will benefit from a well-diversified
offer of products coming from traditional firms and
from new players.
Compliance cost
reductions by way
of exclusion from
Solvency II and by
way of
enhancement of
proportionality
measures for
insurers in the
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 EUR 500 million.
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.
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.
NB: more firms than the estimates provided could
benefit from proportionality measures within
Page | 105
scope of solvency
II
Solvency II, but conditioned to approval by the
supervisor (case by case analysis).
Enhanced
policyholder
protection
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.
Prevention of risks
for the financial
stability
This is achieved through the following:
- More powers for supervisors in relation to macro-prudential supervision
- Harmonising rules in relation to resolution: 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).
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).
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.
In addition, certain studies show that equity investments are more conducive to the greening of
the economy. Therefore, fostering equity investments could positively affect insurers’
financing of the green transition.
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.
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.
Page | 106
II. Overview of costs – Preferred Option
Citizens/Consumers Businesses Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Costs
Direct
During the
“phasing in”
of changes
on interest
rates,
policyholder
protection in
relation to
interest rate
risk would
not be fully
guaranteed.
In relation to IGSs,
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.
**Implementatio
n of new
requirements
including on
planning – those
costs are
expected to be
low (e.g. only
0.46 FTE for
liquidity
planning, 0.06%
of all employees).
** For insurers
excluded from
Solvency II,
switching costs
and compliance
costs of the
national regime.
As an insurer can
** Changes on interest rates may increase
capital costs for life insurers by more than
EUR 48 bn (but compensating measures
on volatility adjustment and risk margin
would be introduced to reduce the impact)
** While the review is balanced in terms
of capital surplus, it would result in a
slight decrease (though very moderate
considering the currently very high level
of SCR ratios) in the solvency ratio of
insurers : less than 3 percentage points at
EU level.
** In relation to IGSs, if 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. This would
represent a yearly capital cost of 0.12% of
gross written premiums.
** In relation to group supervision, certain
**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.
**One-off cost of adapting
supervision to the new rules –
those costs are expected to remain
low.
** increased budget dedicated to
hiring and training supervisors in
charge of insurers subject to
national rules.
** A wave of submission of
application for proportionality
measures would have to be
processed by supervisors in a
short timeframe.
**The supervision of
new rules (e.g. the
volatility adjustment)
would become slightly
more complex. Those
costs are expected to be
low.
** Regular training so
that supervisors remain
knowledgeable of two
sets of rules (Solvency
II and national ones) –
those costs are
expected to remain
low.
**Ongoing monitoring
of the proportionality
measures applied by
insurers (this cost is
expected to remain
Page | 107
always decide to
remain under
Solvency II, the
switching costs
would be
implemented
only if national
rules are less
burdensome.
**Need to submit
notification/appli
cation in order to
benefit from
proportionality
measure – this
cost is low
compared to the
benefit of
applying
proportionate
measures for the
firms concerned.
measures taken in isolation may result in
higher capital costs for certain groups.
However, overall, the review is balanced.
** Some rules , notable on volatility
adjustment, would be slightly more
complex to implement. Those
implementation costs are expected to
remain low.
** Insurers would be required to maintain
the new plans (on recovery and on
liquidity) – those costs are expected to
remain moderate – e.g. 0.41 FTE for
liquidity planning = 0.05% of total
employees.
** For insurers excluded from Solvency
II, ongoing compliance costs with national
rules. Note that it is expected that an
insurer would be under national rules if
those rules prove to be less burdensome
than Solvency II.
**Need to regularly report on the
proportionality measures used – This cost
is low compared to the benefit of applying
more proportionate measures.
** New framework on recovery
and resolution would require
additional human resources (up to
9 FTE and EUR 450,000) –
Those costs remain moderate.
** In relation to IGSs 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.
low.
** Intensified cross-
border supervision and
more requirements on
cooperation would
increase costs for
supervisory authorities
which are currently not
dedicated enough
resources to cross-
border activities.
** New framework on
recovery and resolution
would require
additional human
resources (up to 9 FTE
and EUR 450,000) –
Those costs remain
moderate.
Page | 108
Indirect
Part of the increase
capital or
compliance costs
may be partly
shifted to
customers through
higher premiums.
** The “phasing in” of some
measures would generate
monitoring (but low) costs.
** In rare cases, insurers may be
required to implement measures
to address any identified
impediments to resolution.
Page | 109
3. SUMMARY OF COSTS AND BENEFITS PER PROBLEM
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
contribute to the
greening of the
economy
As green investments require more long-term
financing, and capital financing is more
effective than debt financing in achieving a
reduction of greenhouse gas emissions111
, the
Insurers are the main recipients of this
benefit.
111
See e.g. European Central Bank, Research Bulletin No. 64, “Finance and decarbonisation: why equity
markets do it better”, 27 November 2019 (link).
Page | 110
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.
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 Recurrent One-off Recurrent
Review the
eligibility
criteria for
long-term
investment
s in equity
Direct
costs
Slight
reduction in
the level of
policyholder
protection
compared to
current
rules112
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
Indirect
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
Description Amount Comments
Direct benefits
More robust risk
management
requirements
concerning climate and
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
112
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.
Page | 111
sustainability risks
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”
requirements
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
environmental
risk
management
Less than
EUR 200
000 per
annum and
entity for
compliance
113
Need to build up
capacity on
supervision of
climate and
environmental
risk management
Need to
maintain
capacity on
supervision
of climate
and
environment
al risk
management
Indirect
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
113
See SWD(2018) 264, page 47 (link) and explanations provided in section 6.1.3.
Page | 112
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
competitiveness
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).
In addition, the review is more than balanced in terms of
capital requirements and would release between
EUR 16 billion and EUR 30 billion of capital depending
on the market conditions.
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 significant improvement
in insurers’ solvency position ( up EUR 90 bn in capital
resources in excess of capital requirements).
Insurers would be the main recipients of
this benefit
Indirect benefits
Positive
contribution to
financial
stability
The reduced volatility of the framework would avoid
procyclical behaviour by insurance 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.
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).
Page | 113
II. Overview of costs – Preferred option
Citizens/Consumer
s
Businesses Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Adapting
the
framework
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
Indirect
costs
Adapting
the
framework
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.
Slight
decrease in
solvency
ratios (around
2 percentage
points) due to
a better
reflection of
the low-yield
environment
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
Indirect
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
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
The expected number of insurers concerned
would be in the range between 249 and 435,
The recipients of this benefit are insurers.
Additional firms could benefit from
Page | 114
enhancing
proportionality for
those insurers subject
to Solvency II.
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.
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/Consumer
s
Businesses Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Increase
the
thresholds
of
mandatory
application
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
costs
Enhance
the
proportion
ality within
the
framework
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
proportionalit
y measures
used.
Additional cost
for supervisors
when assessing
the notifications
of the low-risk
profile insurers
and approval
process.
Ongoing
monitoring
of the
proportionali
ty measures
applied by
insurers.
Indirect
costs
Page | 115
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
policyholders
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.
International
competitiven
ess
The preferred option (implying stricter rules governing the supervision of
groups headquartered outside Europe) will improve the monitoring 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.
Insurers would be the
main recipients 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
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
Recipients of this
benefit are citizens
and businesses at large
Page | 116
stability greater resilience in stressed situations. as well as national
governments (less
likelihood to involve
taxpayer’s money to
address the
consequences of a
financial crisis).
Contribution
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
and groups
Direct
costs
Higher
compliance
costs and
increased
capital
requirements
for some
groups.
Higher
compliance
costs and
increased
capital
requirements
for some
groups.
Possible
extra costs
for insurance
companies
conducting
cross border
business.
Implementatio
n costs for
supervisors of
strengthened
and more
intensive
supervision of
cross-border
activities as
well as for
some groups.
Extra cost for
the supervisory
authorities in
the Member
states where
insurers have
significant
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
Page | 117
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 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 and
beneficiaries would be the
main recipients of this
benefit.
Page | 118
policyholders over other stakeholders
II. Overview of costs – Preferred option
Citizens/Consumer
s
Businesses Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Implementing
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
existing
processes such
as the ORSA
could contribute
to contain costs.
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.
Indirect
costs
Implementing
resolution
planning,
including
resolvability
assessments
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
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
Page | 119
EUR 450.000 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
policyholder
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 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.
Eligible claimants, i.e. policyholders and
beneficiaries, which would be natural
persons and micro enterprises, would be the
major recipients of such direct 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.
Page | 120
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
management
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 Recurrent
Introduce a
minimum
harmonise
d
framework
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
Page | 121
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 appropriately
captured under
current rules
Improvement of the ability of supervisors
to intervene in case of liquidity
vulnerabilities not addressed by insurers
In Solvency II there is no quantitative requirement
for liquidity risk as in the banking sector. Those
additional tools would ensure 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/Consumer
s
Businesses Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Integration
of macro-
prudential
consideratio
ns in
insurers’
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
Costs for
maintaining
such new
competences
and services
Page | 122
underwriting
and
investment
activities
and services to
assess macro-
prudential risks
in insurance
Indirect
costs
Increased
complexity in the
risk management
requirements for
insurers
Enhanced
liquidity risk
management
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
Indirect
costs
Page | 123
ANNEX 4: PROPORTIONALITY AND SIMPLIFICATION MEASURES
Full requirement Simplified/proportionate
requirement
Beneficiaries
Pillar
1
Valuation of life insurance
obligations that include
options and guarantees should
by default use stochastic
modelling
Valuation of life insurance
obligations that include
options and guarantees
could use simpler
deterministic approaches
Low risk profile
undertakings meeting
certain criteria
All risks of the solvency
capital requirements must be
calculated at least annually
Immaterial risks may not
be calculated annually
All undertakings which
have immaterial risks
Pillar
2
There should be distinct
persons in charge of key
functions
The same person may
cumulate several key
functions in a firm
Low risk profile
undertakings and, subject
to approval, other insurers
The own risk and solvency
assessment (ORSA) should
be conducted every year
The own risk and solvency
assessment should be
conducted every two years
Low risk profile
undertakings and, subject
to approval, other insurers
A set of complex scenario
testing should be used for the
purpose of the ORSA
Simplified methods may
be used in the own risk
and solvency assessment
Low risk profile
undertakings, and, subject
to approval, other insurers
Rules on deferrals of variable
remuneration
No rules on deferrals of
variable remuneration
Low risk profile
undertakings subject to
some criteria, and, subject
to approval, other insurers
Annual frequency of review
of internal written policies
Triennial frequency of
review of internal written
policies
Low risk profile
undertakings and, subject
to approval, other insurers
Pillar
3
Frequency of regular
supervisory report: at least,
every three years
Triennial frequency of
regular supervisory report
Low risk profile
undertakings and, subject
to approval, other insurers
Annual frequency of
publication of solvency and
financial condition report
Triennial frequency of
publication of “fully”
solvency and financial
condition report
Low risk profile
undertakings and, subject
to approval, other insurers
Deadline for annual
reporting: 14 weeks
Deadline for annual
reporting: 16 weeks
All undertakings.
Deadline for annual
disclosure: 14 weeks
Deadline for annual
reporting: 18 weeks
All undertakings.
Regular supervisory report
has to be drafted and
submitted by each individual
insurer
Single regular supervisory
report for groups which
could cover also the
situation of the individual
insurers in the scope of the
group, and benefiting from
less stringent deadlines.
Groups that meet some
requirements
Quarterly reporting of
prudential information
Annual frequency of
reporting of prudential
information
Low risk profile
undertakings and, subject
to approval, other insurers
Page | 124
ANNEX 5: DISCUSSION ON THE TECHNICAL DESIGN OF THE
MINIMUM HARMONISING RULES IN RELATION TO INSURANCE
GUARANTEE SCHEMES (IGSS)
1. BACKGROUND
The present Annex complements the overall impact assessment on the Solvency II review by
providing further insights on the options for introducing a harmonised minimum regime for
Insurance Guarantee Schemes and their impacts. The analysis performed in this Annex does
not address the issue of consumer guarantees related to the activity of occupational pension
funds that are subject to a specific regulatory framework nor extend to reinsurance
undertakings whose activities are more business-to-business and usually involve no retail
consumers.
The methodology used to estimate the potential costs of establishing an IGS has been
developed by the Commission’s Joint Research Centre (JRC). This methodology as well as
the detailed results of these estimations can be found in the technical report in Annex 6114
.
In the aftermath of the 2008 subprime crisis and the subsequent financial turmoil, the de
Larosière Group recommended the setting-up of harmonised Insurance Guarantee Schemes
(IGS) throughout the EU115
. In response, the Commission announced in its Communication
of 4 March 2009 “Driving European recovery” that it would review the adequacy of existing
guarantee schemes in the insurance sector and make appropriate legislative proposals. In this
context, the Commission published in 2010 a White Paper setting out a European approach to
IGS including indications on appropriate follow-up measures (hereafter, the “2010 White
Paper”).
The European Parliament, in its resolution 2013/2658(RSP) adopted on 13 June 2013, called
for further progress and concrete proposals for a coherent and consistent cross-border
framework for IGS across Member States. The European Parliament based its request on the
observation that some of these Member States experienced extreme difficulties when facing
serious stress and on the need to complement the existing framework composed out of the
Deposit Guarantee Schemes, the Investor Compensation Schemes and the Solvency II
Directives. The European Parliament reiterated its call in the report on the Green Paper on
Retail Financial Services in October 2016.
In 2018, the European Insurance and Occupational Pensions Authority (EIOPA) published a
discussion paper on resolution funding and national insurance guarantee schemes, developing
potential principles for harmonisation. In this context, EIOPA also conducted a survey about
the existing regimes. On 11 February 2019, the Commission addressed a call for Advice to
EIOPA on the review of Directive 2009/138/EC (Solvency II), including on IGSs. In July
2019, EIOPA issued a consultation paper on its Advice on the harmonisation of national
insurance guarantee schemes across the Member States of the European Union, seeking
feedback from stakeholders about this topic. The consultation closed in October 2019. The
114
The lines of business considered in the context of these estimations, which are labelled as “life” and “non-
life” insurance when presenting aggregated results in the context of this Annex on IGS, are disclosed in the
technical report, section 2.2, table 1.
115
“Recommendation 5: The Group considers that the Solvency 2 Directive must be adopted and include a
balanced group support regime, coupled with sufficient safeguards for host Member States, a binding mediation
process between supervisors and the setting-up of harmonised insurance guarantee schemes”.
The full document is available by clicking here.
Page | 125
advice on IGSs116
was included in the Solvency II Opinion that was published and submitted
to the Commission on 17 December 2020.
2. INTRODUCTION
Based on the 2010 White Paper and EIOPA’s Advice, an IGS is set to provide last-resort
protection to policyholders when insurers are unable to fulfil their contractual commitments
in case of failure. The aim is thus to protect natural or legal persons (i.e. policyholders and,
where applicable, beneficiaries) from the risk that their claims will not be met if their
insurance undertaking becomes insolvent. IGSs provide protection either by paying
compensation to policyholders (or beneficiaries) for their claims, or by securing the
continuation of their insurance contract. This can be done either by facilitating the transfer of
the policies to a solvent insurer or by directly administrating the policies as a bridge
institution.
A fragmented landscape
Unlike the banking and securities sectors, there are no harmonised EU rules for IGSs for the
time being. When they have an IGS, Member States have each chosen their own approach in
terms of IGS design: geographical coverage (where does the IGS protection extend?),
purpose (does the IGS act as a “pay box” or can it take other actions?), scope of eligible
policies (what is subject to IGS protection?), coverage level (what amount are policyholders
actually protected for?), eligible claimants (are all policyholders protected or only natural
persons?) and funding (does the IGS have sufficient financial resources to act?). These
approaches can diverge quite substantially from each other, thereby affecting the treatment of
policyholders in the event of failure, in particular in a cross-border case.
As shown by EIOPA117
and summarised in table 1, 17 Member States (and Norway) operate
one or more IGS(s). Of those, eight118
Member States (and Norway) cover both life and
(selected) non-life policies insurance; five119
Member States cover (selected) non-life
insurance only; and another four120
Member States cover life insurance policies only.
Table 1 – Existing policyholders’ protection schemes in the EU 27
Source: EIOPA
Excluding Motor Liability Insurance policies, 17 Member States (AT, BE, BG, DK, EE, FI, FR, DE,
EL, IE, IT, LV, MT, PL, PT, RO, ES) have already implemented one or more IGS, covering some life
and/or non-life policies. 10 Member States (HR, CY, CZ, HU, LT, LU, NL, SK, SE, SI) have not
implemented any IGS.
116
Together with an advice on a minimum harmonisation of the recovery and resolution framework.
117
See Annex 13.1 of the background analysis supporting EIOPA’s Advice.
118
Austria, Belgium, France, Latvia, Malta, Poland, Romania, and Spain.
119
Denmark, Finland, Ireland, Italy and Portugal.
120
Bulgaria, Estonia, Germany and Greece.
Page | 126
This situation means that, under the current conditions, not all policyholders in Europe
benefit from the protection of an IGS and that, where they do, policyholders with similar
policies would not necessarily enjoy the same degree of protection in the event of liquidation.
In addition, the continued increase of cross-border activity in insurance – providing insurance
services in other countries either directly (free provision of services or FoS) or by setting up
branches (freedom of establishment or FoE) – emphasises the importance of a harmonised
approach to consumer protection. At year-end 2018, in the EEA, EUR 82.5 billion gross
written premiums (GWP) are reported via free provision of services (FoS) and EUR 71.7
billion via freedom of establishment (FoE)121
. The previous period, EUR 66.5 billion GWP
were reported via FoS and EUR 75.5 billion via FoE. This accounted for approximately 10%
of all gross written premiums in the EEA at the end of 2017, which is an increase of 25%
compared to 2016 when the cross-border business accounted for 8% of GWP in the EEA. Out
of 2686 (re)insurers under Solvency II, 847 reported cross-border business within the EEA in
2017 compared to 750 in 2016122
. Even in Member States that have IGSs, these schemes do
not necessarily always cover cross-border activities.
History shows that the decision to establish an IGS in the Member States, and most probably
its structure, have been prompted by a concrete (risk of) insurance failure. Where no major
defaults took place to date there was not much incentive to set up an IGS. EIOPA provides in
its background analysis the following list of examples.
 In the early 1920s, the Austrian system was introduced and significantly improved
after the failure of an insurance company;
 The Spanish system founded in 1984 answered the need for protection of
policyholders as a consequence of the market reorganisation linked to Spain’s
accession to the EU;
 The French life and health fund was created in 1999 following a near failure
experience of a life insurer;
 In Germany, the creation of the health scheme was an initiative of the health insurance
sector that aimed at strengthening the trust in the sector following financial stress in
2002. While no failure were observed so far (neither in the health sector nor in the life
insurance market) an IGS for life insurance was also introduced;
 In Greece, the scheme was established shortly after the failure of two large life
insurers in 2009.
121
See p 633 of the background analysis supporting EIOPA’s Advice.
122
See pp 684-685 of the background analysis supporting EIOPA’s Advice.
37%
63%
No IGS IGS
24%
29%
47%
Breakdown per policies
Life
Non-life
Both
Page | 127
The failure of insurance companies
In 2014, EIOPA started to gather information from NSAs on a voluntary basis about relevant
cases of insurance failures and near misses that occurred in the European Economic Area. It
comprises now a sample of 195 affected insurance undertakings from 1999 to 2018. As
illustrated in table 2 below, failure and near-miss incidents have been decreasing since the
subprime crisis (2008) and the entry into force of Solvency II (2016) further contributed to
that trend.
Table 2 - Cases of failure and near-miss reported to EIOPA
Source: EIOPA own database of failure and near-misses events, European Commission
The evolution of reported failure and near-miss events spiked during the subprime crisis and the
following sovereign crisis. The overall trend is however decreasing, in particular since the entry into
force of Solvency II. With the material exception of the subprime crises, most failure events
concerned non-life insurers. From 2016 onwards, non-life insurers represented 55.6% of the cases
while life insurers and composite insurers represented 30.6% and 13.8% of the cases respectively.
The analysis of the causes of failure (see below) confirms that life insurers are particularly affected
by adverse market developments. This is reflected in the graphs.
0
5
10
15
20
25
30
35
40
Evolution of failure and near-miss events
Number of events Failure Near-miss Ongoing
Page | 128
On 25 February 2020, KPMG published a review of insurance companies’ insolvencies and
business transfers in Europe123
that concluded on the positive effects of prudential regulations
introduced in Europe since 2001. In particular, the study noted that failures after 2001 have
significantly reduced in numbers and concerned smaller companies, thereby creating less
impact and affecting fewer creditors.
However, the past financial crisis (2008) required governments to intervene in the financial
sector, including in the insurance business, in order to minimise losses to consumers and/or
maintain financial stability124
. EIOPA considers in its background analysis (see § 13.60) that
the Solvency II framework has significantly improved the supervision of insurers and,
therefore, contributed to the reduction of the likelihood of insurance failures but has not fully
eliminated this risk. It should indeed be acknowledged that capital requirements are not
designed to cover all unexpected losses.
Such situation has been illustrated by recent cross-border failures that left unsuspecting
policyholders without coverage and exposed the absence of cross-border coordination
mechanisms, with sometimes disagreements and media coverage as to which Member State is
responsible for compensation of policyholders or beneficiaries (See box below for some
examples).
Examples of cross-border failures
Company A
Company A was incorporated in an EEA country without IGS protection. It wrote various types of
insurance across the EU market using its EU passport, but not in its country of incorporation. In 2016,
its failure left 120,000 policyholder in eight Member States, including Denmark, uncovered. Among
others, the Danish Parliament decided to extend the coverage of the Danish IGS to Danish
policyholders that had an outstanding insurance claim against the company. Subsequently, Denmark
decided that its IGS should permanently switch from the home country principle to the host country
principle, as of 2019.
123
This study – prepared for, an on behalf of, the following industry associations: ICISA, ITFA, IUA and
Lloyd’s Market Association – reviewed the non-life insurance company failures over the last 30 years within
UK, FR, IT, DE, NL, SE and Gibraltar.
124
See European Commission, State Aid Scoreboards and European Commission, “Note for discussion by
Expert Group on Banking, Payments and Insurance (EGBPI) meeting on 5 March 2015”.
0
5
10
15
20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Decomposition of the failure events per type of
insurer
Failure Life Non Life Composite Reinsurer Composite
Page | 129
Company B
Company B was an EU-based insurance group that had approximately 400,000 policyholders in ten
Member States. It mainly provided insurance policies on motor, property, general liability and income
protection insurance. It was declared bankrupt in 2018, just before its home country changed the
coverage of its IGS from the Home country principle to the Host country principle. A later declaration
would have meant that the policyholders residing outside of its home country would have no longer
been protected by the local Guarantee Fund. For example, it had 51,000 policyholders in another
Member State, with around 1,500 outstanding claims at the date of failure.
‘Dommage ouvrage’ insurance in France
Several EU-based companies offering, among others, builders warranty insurance in France through
their EU-passport went into bankruptcy in the last five years. This specific product was either not
covered or not eligible for protection from the local IGS. Given that the French IGS applied a home-
country principle at that time, the French policyholders of these failed companies suffered substantial
losses and/or long delays until they were compensated from the insolvency estates.
Insurance companies, like any other commercial companies, can still fail and produce
substantial losses; and, when it occurs, not all claims can necessarily be covered from the
insolvency estate of the failed undertaking. EIOPA stresses that these recent failures of cross-
border insurers have proven that even in a Solvency II environment, failures of insurers
cannot be avoided. EIOPA further concludes that the risk of policyholders being exposed to
potential financial loss and/or social hardship remains real. Another example is the case of a
Dutch life insurance company that was declared bankrupt at the end of 2020. Based on a
preliminary valuation performed by the curator, the entitlement of policyholders could have
to be restricted to 70% of their claims.
Beyond the non-zero likelihood of failures (see also next section), an analysis of their main
causes provide further insights, especially in the current economic context. Such an analysis
was already provided in the 2010 White Paper, in reference to the 2007 Oxera report125
.
These causes appeared to be sometimes linked, sometimes not linked, to financial markets
and depended on the nature of the insurance activities.
Non-life insurance undertakings, for instance, are usually less affected by financial market
developments due to the short duration of their policies and of the corresponding investment
portfolio. Their losses tend to arise mainly from non-financial liabilities and the realisation of
related underwriting risks. In fact, losses by non-life insurers are typically caused by higher
than expected claims (due, for example, to natural catastrophes, etc.) or mispricing (i.e.
premiums do not adequately reflect the insured risks) rather than by investment losses.
By contrast, considering the long duration of their asset-liability structure, life insurers are
much more exposed to financial market developments and their losses are usually mainly
generated by financial liabilities. This does not mean however that life insurers could not be
exposed to insurance losses from non-financial events, such as unexpected rates of mortality
due, for example to pandemics or increased longevity. However, market and investment risks
appear to be the main sources of risks for them. This is particularly the case for ancillary
insurance portfolios for which life insurers offered a guaranteed investment performance to
policyholders. In terms of mechanics, when financial markets fall or in period of high market
volatilities, returns on assets could be significantly reduced while simultaneously the
125
For an in-depth complementary analysis of the risks faced by insurance undertakings, please see subsection
4.1 of the 2007 Oxera report.
Page | 130
actualised value of liabilities could be increased (as notably the discount rate decreases),
making life insurers particularly sensitive to losses arising from their financial positions.126
These observations have been confirmed by the empirical evidences provided by EIOPA in
its 2018 report on (near-)failure cases, based on data spanning from 1999 to 2016. In
addition, in the four latest publications of its Financial Stability Reports, EIOPA stressed the
sensitivity of insurance undertakings to market developments and, in particular, the effects of
protracted low interest rates. This situation, confirmed by the International Monetary Fund
(IMF) in its April 2020 Global Financial Stability Report, has been identified as a key risk for
both insurers and pension funds, putting pressure on both their capital positions and their
long-term profitability. In its 2021 outlook for the European Insurance Sector, published on
10 December 2020, Moody’s Investors Service warned about the negative impacts of low
interest rates and of the prostrated prospects for the overall economy, affecting both life and
non-life insurers’ revenues and profit margins.
EIOPA noted the following other vulnerabilities stemming from the current economic
environment:
 Large declines in interest rates could create further incentives for insurers and pension
funds to search for yield and undergo riskier investments.
 Maturing fixed-income securities could only be replaced by lower yielding securities
(i.e. so-called reinvestment risk), gradually affecting profitability, in particular for
insurers and pension funds with relatively high nominally guaranteed liabilities and
large exposures to fixed-income securities.
 In case of sudden increase of interest rates, life insurers could also suffer a sudden
increase in lapses and surrenders, as other financial investments may become more
attractive for instance. Life insurers could then face an increase in both lapses and
surrenders in a short period127
, leading to possible liquidity constraints.
Apart from operational causes, the 2010 White Paper also considered that losses for insurance
undertakings might be generated by fraud and, more generally, by the severe agency
problems that insurance undertakings are potentially subject to. These agency problems,
mainly caused by the length and the "inversion" feature of the insurance cycle, i.e. the fact
that premiums are cashed in at an early stage and that claims are paid off only at a much later
stage, could induce risk-taking behaviours and wealth-shifting from policyholders to
shareholders for instance.
Furthermore, in its December 2019 Financial Stability Report, EIOPA considered that the
level of interconnectedness with banks and a high degree of home bias in investments could
lead to potential spillovers of risks from other sectors and increase the sovereign-insurance
loop. This situation was also highlighted by the IMF in its April 2019 Global Financial
126
As noted in the 2010 White Paper, when life insurance contracts are non-unit linked, investment/market risk
is normally borne by the insurance undertaking. On the contrary, when life insurance contracts are unit-linked,
investment/market risk is normally borne by policyholders. On the basis of EIOPA’s Financial Stability Report
of July 2020, it appears that the share of unit-linked business, while having slightly increased in the first quarters
of 2019, remains lower that the levels in 2017 and 2018 with an average share at the end of 2019 of 36,5%. In
reality, however, distinctions are difficult as in both unit-linked and non-unit linked products investment risk is
shared de facto between insurers and policyholders. In the unit-linked sector, in fact, there are many insurance
undertakings that offer guarantees to policyholders. They take a wide variety of forms including minimum
returns, fixed annuity rates as well as contractual terms such as early or regular withdrawal of funds on terms
that give policyholders valuable options. Thus, in these cases, the insurance undertaking bears some of the
market/investment risk and clear-cut distinctions are difficult to draw.
127
Although several legal implications, such as penalties or fiscal benefits, could limit the impact of lapses and
surrenders in some countries, EIOPA notes that this situation could add additional strains on insurers’ financial
position once yields will start increasing.
Page | 131
Stability Report where it stressed that insurance companies could also become entangled in
the sovereign-financial sector nexus given their significant holdings of sovereign, bank and
corporate bonds. In particular, the IMF stressed that insurance companies in some countries
have a high share of riskier securities (subordinated and hybrid debt) in their bank bond
holding, thereby being more exposed to shocks and possible write-down of debt instruments
in the banking sector.
The default likelihood of insurers
An empirical analysis of failures and near-misses reported voluntarily by NSAs in EIOPA’s
internal database since the entry into force of Solvency II (2016) shows that there has been a
small but non-negligible number of failures or near-failures that involved mainly small non-
life insurers, some of which with a cross-border dimension.
Out of the 36 cases that composed the sample, six cases concerned companies with total
assets above EUR 1,000 Million. Most of them represented a small share of the market (all
reported cases, except two, had a market share of below 10% for their non-life or life
business). 27.8% involved a cross-border dimension as the failing insurers were active abroad
through of one or more branches (cases of direct cross-border selling may be under-reported).
The (near-)failing insurer was part of a group in one third of the cases (33.3%). 25% of the
cases in the sample were on-going in 2020.
By contrast, the market perception seems to focus on the economic environment and
prevailing market conditions, considering that life insurers are generally more risky than non-
life insurers. Please refer to table 3 below showing the evolution of the insurance credit
default swap (CDS) spreads from March 2010 to November 2019 (from EIOPA June 2019
Financial Stability Report, left panel) and from January 2008 to March 2021 (right panel).
Table 3 – Default risk perception of the insurance sector based on CDS spreads
Sources: Bloomberg, EIOPA June 2019 Financial stability report (left panel), EIOPA (right panel)
The price of a CDS (i.e. its spread) reflects the perceived credit quality of the referenced underlying
asset. It therefore echoes the default risk perception of the market. The evolution and level of CDS
spreads show a higher default perception for life insurers, and a greater sensitivity to market
conditions. That observation might reflect the current challenges faced by life insurers in an
environment of prolonged low interest rates and economic slowdown. The perception of default is
however generally lower nowadays than during the subprime and sovereign crises. The default
perception for non-life insurers moves around the one of composite insurers or reinsurers. It appears
to be regularly above these ones since the end of 2013, and in particular at the end of 2019 and at the
beginning of 2021.
Page | 132
Other indicators of the likelihood of failures are available. Table 4 below presents the
evolution of the one-year default rate forecast developed by Moody’s Investors Service from
December 2019 to March 2021.
Table 4 – One-year default rate forecasts for EU insurers
Sources: Moody’s Investor Service, European Commission
The forecasts developed by Moody’s are issuer-weighted and include both investment-
grade and speculative-grade companies. After a peak in March 2020, we observe a
decreasing trend towards a default rate of 0.20%.
Moody’s sets the default rate (over a one-year horizon) as per March 2021 to 0.28% for EU
insurers. Caporale et al. estimate the probability of default of all firms in the last ten years
0,00%
0,10%
0,20%
0,30%
0,40%
0,50%
0,60%
0,70%
December 2019 March 2020 December 2020 March 2021
Europe
Page | 133
lays between 0.2% and 0.4%.128
A more recent publication from A.M. Best Company
publishes estimate for the liquidation rates in the US insurance sector to be around 0.36%.129
Therefore, on the basis of both historical data and model estimations, and for the purposes of
this impact assessment, it has been decided to test three possible values for the “average over
the cycle” probability of default (PD) of insurance undertakings: 0.05%, 0.1% and 0.5%. The
higher rate of 0.5% corresponds to the Solvency II “target”. The lower rate of 0.05% is
considered to envisage the possibility that estimates based on the conventional insolvency
definition might be an over-estimation of the occurrence of failures in practice.
Estimates of potential losses associated with the failures of insurance
companies
Failures of insurers can lead to substantial losses. However, considering probabilities of
default of 0.05%, 0.1% and 0.5%, not all insurers are expected to default and not all at the
same time. Historical cases mentioned above provide only a very general and rough
indication of losses that might affect policyholders in the future. It can however be
reasonably expected from these past examples that estimated potential losses would, in
general, be lower than those potentially triggered by the failure of the largest insurer in each
domestic market.
For the purpose of the impact assessment, the Commission services estimate the losses
affecting policyholders using a theoretical model that is consistent with the one used for the
2010 White Paper. As explained in the 2010 White Paper, the order of magnitude of the
estimated loss distributions are tested based on selected past failures in the EU that fall in a
range between the 75% and the 99% percentile of the estimated loss distributions.
The technical report (see Annex 6) explains in detail the Credit Value-at-Risk (Vasicek-
model130
) methodology and the estimated losses potentially affecting policyholders in each
Member State in a one-year time horizon.
The model in question allows to estimate policyholders' losses combining the effect of
various elements, such as:
 the exposure at default (EAD);
 the probability of default (PD);
 the correlation of defaults between insurers (how probable is it that defaults happen at
the same time);
 the concentration of the insurance market (how many insurers dominate the market);
and,
 the severity (Loss Given Default) of the losses in case of default.
Table 5 presents the EAD of the whole insurance sector in each Member States and in the EU
at the end of 2018. The EAD is an estimation, based on technical provisions and solvency
capital requirements, of the maximum losses for the society that would occur in each Member
State and in the EU in the case of failure of the entire insurance sector131
. These hypothetical
128
G. M. Caporale, M. Cerrato, X. Zhang, Analysing the determinants of insolvency risk for general insurance
firms in the UK, Journal of Banking and Finance 84, 2017.
129
Best’s Impairment Rate and Rating Transition Study – 1977 to 2018 - Impairment Review, June 12, 2019,
The Best Company.
130
The main reason supporting the choice of a Vasicek model has been the limited amount of information
available to feed in the model. A Vasicek model is also used, for example, in the derivation of FIRB capital
requirements under Basel II. For more details on the Vasicek model, see Section 2.1 of the technical report.
131
On the methodology used to estimate the EAD, see in the technical report, Section 3.5.
Page | 134
maximum losses illustrate the systemic relevance of the entire sector for the economy and
potential exposure for policyholders or taxpayers, in the absence of IGS.
Table 5 – Exposure at default (EAD) in EEA and EU countries, 2018132
Source: Joint Research Centre, European Commission
The figures presented below illustrate the maximum possible loss estimated on the basis of the
continuation principle that delivers a slightly higher amount than under the assumption of a
compensation principle. Reported figures are in million EUR.
Total Life Non-life Total Life Non-Life
AT 95.050 82,655 13,538 IT 783,723 716,209 65,906
BE 264,963 248,278 22,617 LI 23,720 20,563 3,576
BG 1,811 627 1,181 LT 1,043 813 282
CY 2,572 1,940 668 LU 191,086 175,111 20,536
CZ 11,083 7,381 3,915 LV 590 257 334
DE 1,551,858 1,358,998 221,471 MT 4,896 4,548 1,025
DK 326,265 312,802 13,587 NL 422,767 376,222 50,673
EE 1,506 1,091 464 NO 159,726 147,318 14,159
EL 13,104 10,743 2,306 PL 27,623 19,360 8,325
ES 231,999 201,108 34,296 PT 47,537 44,422 3,246
FI 63,728 58,518 5,781 RO 2,463 1,394 1,063
FR 2,226,836 2,025,166 215,131 SE 240,010 210,829 31,106
HR 3,792 2,811 1,003 SI 5,935 4,032 2,220
HU 6,894 5,721 1,231 SK 4,882 4,048 894
IE 250,803 223,342 31,966 EU 27 6,784,822 6,098,429 754,766
IS 675 111 562
EU-
EEA
6,968,944 6,266,422 773,062
Table 6 presents the EAD/GDP ratios at the end of 2018. For the entire EU 27, the EAD of
the insurance sector at the end of 2018 would amount to about 50% of the GDP.
Table 6 – Exposure at default (EAD) over GDP in EEA and EU countries, 2018
Source: Technical report, Eurostat
The figures presented below are ratios of EAD over GDP on the basis estimated maximum losses
132
As stated in the technical report, due to the difference in Gross Direct Written Premium (GDWP)/Technical
Provision (TP) ratio, and possibly in similar TP/Solvency Capital Requirement (SCR) and GDWP/SCR ratios,
approximations to obtain estimates of EAD without motor and import of services from outside the EU introduce
uncertainty in the calculations. This could result in some counter-intuitive results, such as seeing Total insurance
not corresponding to the actual total of “total life” and “total non-life”. A statistical procedure to force
reconciliation could have been used to minimize these discrepancies. This would however have required the
introduction of further assumptions and could increase the possible error in the final estimates. It was therefore
chosen not to force reconciliation.
Page | 135
presented in table 6 of the technical report.
Total Life Non-life Total Life Non-Life
AT 25% 21% 4% IT 44% 40% 4%
BE 58% 54% 5% LI 407% 353% 61%
BG 3% 1% 2% LT 2% 2% 1%
CY 12% 9% 3% LU 318% 292% 34%
CZ 5% 3% 2% LV 2% 1% 1%
DE 46% 40% 7% MT 39% 36% 8%
DK 108% 103% 4% NL 55% 49% 7%
EE 6% 4% 2% NO 43% 40% 4%
EL 7% 6% 1% PL 6% 4% 2%
ES 19% 17% 3% PT 23% 22% 2%
FI 27% 25% 2% RO 1% 1% 1%
FR 94% 86% 9% SE 51% 45% 7%
HR 7% 5% 2% SI 13% 9% 5%
HU 5% 4% 1% SK 5% 5% 1%
IE 77% 68% 10% EU 27 50% 45% 6%
IS 3% 1% 3% EU-EEA 50% 45% 6%
As stressed by EIOPA through the notion of “financial and social hardship” developed in its
Advice, losses incurred by policyholders might be different in nature depending on the
insurance contract and on how the failure is resolved. Failure of a life insurer may cause the
loss of expected policy benefits, which can be significant particularly if the policy was
purchased to provide for retirement income. Losses on savings and investment products may
equally result in important wealth losses, when guarantees given cannot be honoured. With
regard to non-life insurance failures, losses to policyholders may result from the loss of the
policy benefit (e.g. protection), in particular regarding the open claims, as well as from the
loss of premiums already paid in advance.
Assuming a probability of default of 0.1%, and in total absence of IGS in Member States,
losses resulting from failures of insurance undertakings happening in a one-year time
horizon, that could (with a 99th confidence level) be passed on to policyholders or taxpayers,
could amount to133
:
 13.6 billion EUR for total (life and non-life) insurance in the whole EU, which is
some 1.50% of the total EU annual gross written premiums;
 12.3 billion EUR for life insurance only, which is some 2.12% of the EU annual gross
written life premiums;
 1.5 billion EUR for non-life insurance only, which is some 0.46% of the EU annual
gross written non-life premiums.
These estimations show that, when EU insurance undertakings fail, EU policyholders or
taxpayers could incur very significant losses. The current fragmented landscape of national
133
Results displayed may be slightly overstated, as the single factor model that is used assumes the same
correlation factor between insurance undertakings across all Member States. Results are provided for the year
2018 under the home and continuation principles, a probability of default of 0.1% and a confidence level of
99%. Similar results are observable for 2016 and 2017.
Page | 136
IGSs raises significant questions as to their ability to mitigate adequately the potential losses
for policyholders and beneficiaries.
Based on the information provided in table 1, around 37% of the losses resulting from
failures of insurance undertakings would not be covered by any IGS, which would amount
approximately to 5 billion EUR for total (life and non-life) insurance in the whole EU. The
remaining 63% would only be partially covered, as not all existing IGS ensure full coverage
of all life and non-life policies. On the basis of a rough estimates of the coverage level,
approximately 53% of these policies would appear not be covered, leading to an additional
uncovered loss of 4.5 billion EUR.
At this juncture and despite funds available in existing IGS, significant losses stemming from
the failure of insurance undertakings could reach about 9.5 billion EUR and affect EU
policyholders or taxpayers.
In view of the increasing importance of cross-border activities, the divergent geographical
approaches across the EU could be a concern for the appropriate coverage of those activities
by existing IGSs.
Based on the model estimations, assuming a probability of default of 0.1%, losses that could
(with a 99th
confidence level) result from exported/imported cross-border business and hit
non-domestic/domestic policyholders or non-domestic/domestic taxpayers in a one-year time
horizon, could amount to134
:
 EUR 0.99 billion for total insurance, which is around 1.50% of total (life and non-life)
annual gross written premiums paid in the EU for cross-border insurance;
 EUR 0.90 billion for life insurance, which is around 2.12% of life annual gross
written premiums paid in the EU for cross-border insurance;
 EUR 0.11 billion for non-life insurance, which is around 0.46% of non-life annual
gross written premiums paid in the EU for cross-border insurance.
It follows from this empirical analysis that significant losses stemming from defaults of
insurance undertakings operating in a cross-border setting could be exported to non-domestic
policyholders. Similarly, domestic policyholders could suffer important losses if they have
purchased policies from a defaulting insurance undertaking in another Member State, when
these losses are not covered by an IGS in the Home and/or the Host Member State.
Losses could (partially) be recovered from the estate of the liquidated insurer. However, this
process takes time and is cumbersome. An IGS could subrogate into the policyholders’
claims and recover more efficiently from the estate than natural persons and small companies
could do. Therefore, IGS have the potential to cover the gap in terms of timing and in terms
of remaining losses. The recoupment from the insolvency estate could contribute to the
replenishment of any pre-funded IGS.
Objectives of an EU action
Taking into account the domestic and cross-border context, potential future EU action on IGS
protection should pursue the main objective of ensuring an even and comprehensive
protection of policyholders. Achieving this objective would contribute to maintaining
consumers’ confidence in the insurance sector and the Single Market for insurance. By
protecting policyholders’ wealth and avoiding suboptimal allocation of insurance failure
losses to taxpayers, the framework would prevent or mitigate possible consequential
134
Figures are based on a probability of default of 0.1% and calculated at year-end 2018.
Page | 137
slowdowns of the real economy and preserve more generally the system-wide stability of
financial markets.
In this perspective, the design of the IGS framework and the analysis of policy options will
consider the following elements as additional objectives.
1. Avoid competition distortion: the design of the IGS framework should contribute to a
level-playing field between insurance companies and ensure competitive neutrality for
business conducted by domestic insurers and incoming EU insurers that operates
through FoS or FoE.
2. Reduce moral hazard: the design of the protection mechanisms should take account of
the risk of moral hazard for policyholders, insurers and supervisors/public authorities.
As pointed out by EIOPA135
, the existence of a safety net in the form of an IGS could
lead consumers to be less inclined to do a proper due diligence. However, this
assumes that consumers are generally well informed. Given the difficulty for
consumers to assess risk-related information, it can be argued that the introduction of
a protection mechanism would not induce wrong incentives. Similarly, a harmonised
framework on IGS should prevent taxpayers from ultimately bearing the costs of an
undertaking's mismanagement by introducing a legal framework which is financed by
the undertakings themselves and that does not incentivise excessive risk-taking136
.
Finally, the design of an IGS should ensure that supervisors are encouraged to carry
out their supervision properly, including in the context of cross-border activities137
,
facing the financial consequences of resorting to the last resort safety net.
3. Ensure cost efficiency: As explained in the 2010 White Paper, EU action on IGS
should strike the right balance between the benefits to policyholders and the costs
linked to the protection offered. This means that both welfare costs of protection as
setup costs would need to be minimised taking into account existing national
structures. In the end, an IGS that is not cost efficient would lead to higher costs for
policyholders. This approach takes account of the costs redistribution effect provided
through the implementation of the IGS, noting that it would absorb an amount of
losses that is equal to the losses that would hit consumers (or taxpayers) in the
absence of such a protection mechanism.
4. Ensure market confidence and stability: EU action on IGS should finally aim at
enhancing market confidence and furthering the stability of the EU internal market in
insurance services.
3. ANALYSIS OF POLICY OPTIONS
This section builds extensively on EIOPA’s Advice that duly analysed the costs and benefits
of the main options considered from a qualitative point of view. Where relevant (and feasible
considering the data limitations), EIOPA’s analysis and conclusions are completed by
quantitative estimations provided by the model developed by the Commission services.
135
See § 13.37 of EIOPA’s background analysis.
136
See § 13.38 (and footnote 342) of EIOPA’s background analysis.
137
A resolution authority or an administrator may focus on the interests of creditors and policyholders in their
own jurisdiction, e.g. by ring-fencing the capital instead of using it to cover capital shortages in other Member
States. Supervisors have reduced incentives to supervise insurers that concentrate on FoE and FoS.
Page | 138
The following table adapts table 13.1 of EIOPA’s background analysis and provides an
overview of the main options that have been considered. Options indicated in bold are those
advised or preferred by EIOPA.
Policy Issues Options
1. Need for harmonisation of
national IGSs in the EU
1.1 No change (maintain status quo)
1.2 European network of national IGSs (minimum
harmonisation)
1.3 Single EU-wide IGS (maximum harmonisation)
2. Need for harmonisation of
roles and functions of national
IGSs
2.1 Full discretion to Member States
2.2 Compensation of claims
2.3 Continuation of policies
2.4 Continuation of policies and/or compensation of claims
3. Need for harmonisation of
geographical scope of national
IGSs
3.1 Full discretion to Member States
3.2 Home-country principle
3.3 Host-country principle
3.4 Host-country principle plus recourse arrangements
4. Need for harmonisation of
eligible policies
4.1 Full discretion to Member States
4.2 Life policies only
4.3 Non-life policies only
4.4 Both life and non-life policies
4.5 Selected life and non-life policies
5. Need for harmonisation of
the coverage level
5.1 Full discretion to Member States
5.2 Determine a single minimum ceiling (e.g. EUR 100,000)
across Member States
5.3 Determine a minimum ceiling and a percentage share
for life, and only a percentage share for non-life insurance.
6. Need for harmonisation of
the timing of funding
6.1 Full discretion to Member States
6.2 Ex-ante funding
6.3 Ex-post funding
6.4 Ex-ante funding complemented with ex-post funding
7. Need for harmonisation of
the nature of contributions
7.1 Full discretion to Member States
7.2 Flat-rate contributions
7.3 Risk-based contributions
8. Need for harmonisation of
the target level
8.1 Full discretion to Member States
8.2 Harmonization at EU level
8.2.1 Low risk, low security (PD=0.05%, percentile=75%)
8.2.2 Low risk, medium security (PD=0.05%,
percentile=90%)
8.2.3 Low risk, high security (PD=0.05%, percentile=99%)
8.2.4 Medium risk, low security (PD=0.1%,
percentile=75%)
8.2.5 Medium risk, medium security (PD=0.1%,
percentile=90%)
8.2.6 Medium risk, high security (PD=0.1%,
percentile=99%)
Page | 139
8.2.7 High risk, low security (PD=0.5%, percentile=75%)
8.2.8 High risk, medium security (PD=0.5%,
percentile=90%)
8.2.9 High risk, high security (PD=0.5%, percentile=99%)
9. Need for harmonisation of
eligible claimants
9.1 Full discretion to Member States
9.2 Natural persons only
9.3 Natural persons and selected legal persons
9.4 Natural persons and legal persons
The need for harmonisation of national IGSs in the European Union
The differences in national approaches towards IGS have resulted in a situation where
policyholders across the EU could have different level of protection when their insurer fails.
This fragmentation could also have implications for the level-playing field in insurance and
the proper functioning of the internal market. Some insurers could benefit from a possible
competitive advantage resulting from the existence of an IGS coverage while, at the same
time, other insurers could have to contribute to more than one IGS because of the overlaps
between schemes. Additionally, consumers could be treated differently across the financial
sectors for comparable financial products, such as life insurance products versus saving
products offered by banks.
EIOPA assessed three options in its Advice and concluded that the most favourable option
was to establish a European network of national IGSs that are sufficiently harmonised across
the Member States. This approach would mean that every Member State would have in place
a national IGS that meets the minimum harmonised features agreed at EU level.
Table 7 reproduces the evaluation of policy options that EIOPA performed and that supports
its conclusion.
Table 7 – Summary of policy options’ evaluations – Minimum harmonisation of IGSs
With regard to the objectives, such an approach would reduce risks to policyholders. Indeed,
although Solvency II significantly improved the supervision of insurers and, hence, reduced
the likelihood of insurance failures in the future, it has not fully eliminated this risk. The
recent failures of cross-border insurers demonstrated that even in a Solvency II environment,
failures of insurers are not completely avoided. EIOPA concludes in that regard that the risk
Page | 140
of policyholders being exposed to potential financial loss and/or social hardship remains real.
In addition, normal insolvency procedures are often lengthy138
, expensive and often failed to
deliver the Solvency II objective of policyholder protection. Lastly, in the absence of IGS
protection losses simply fall either on policyholders or on taxpayers, unless they are dealt
with through ad-hoc solutions involving the surviving insurers. An example of such private
initiative could be found in the creation of Protektor AG in Germany that took over the
insurance portfolio of the failing company, Mannheimer Lebensversicherung AG, in 2002 as
a bridge insurer to ensure the continuation of the policies.
The harmonisation of national IGSs would also result in a more even level of protection to
policyholders in the event of failures across the Member States. Additionally, it would
facilitate cross-border cooperation and coordination between national IGSs, which is essential
for the effective and prompt functioning of IGSs in cross-border failures. This is particularly
relevant when considering that the cross-border activities in insurance have been increasing
over the years and are relatively high. Furthermore, the existence of an effective protection
mechanism is likely to enhance the confidence in the industry and, hence, contribute to
enhancing the overall financial stability in the EU. Finally, the reliance on public funding and
taxpayers’ money would be further minimised, which can also contribute to reducing the
existing home bias in insurance139
and the associated sovereign-insurance loop.
The arguments against the set-up of an IGS are the following. Failure incidents have been
decreasing for 20 years and Solvency II has further decreased the probability of default.
Unlike with deposit protection, there has been, so far, no need to prevent an “insurance run”
to safeguard financial stability. The fact that policyholders’ claims enjoy a relatively high
ranking in the creditor hierarchy should make it possible to pay most insurance claims from
the insolvency estate. Therefore, the cost of IGS would be disproportionate. In addition,
EIOPA analysis considers that the costs associated with the creation and the management of
an IGS feature among the drawbacks of IGSs but that the benefits of minimum
harmonisation, such as greater confidence of policyholders in the insurance market, would
outweigh these costs. Pointing to the risk of moral hazard created by the existence of a
network of IGSs, EIOPA suggests that they can be addressed through their technical features;
in particular, the method of calculating insurers’ contributions could reflect the risk profile of
each contributing insurer.
Some political considerations could also be relevant in the assessment of various options and
determine the eventual outcome for the preferred option. A first consideration relates to the
positions of Member States. In that perspective, the interactions with Member States in the
Commission’s expert group showed that 18 Member States broadly supported EIOPA’s
advice to set up IGSs with different nuances and depending on the desired design, Four
Member States were still analysing the possibility of an IGS harmonisation at EU-level in
relation to their national systems. Three Member States expressed a negative opinion. A
second consideration relates to the need for an adequate balance in the overall package for the
Solvency II review in terms of cost for the industry. The design options developed thereafter
and the preference expressed assume the choice to pursue with a minimum harmonisation of
IGSs in the EU.
138
Only one quarter of insolvencies are completed within a year, while 38% last longer than two years (EIOPA
database of failures and near misses (figures from 2018))
139
See EIOPA Financial Stability Report – June 2019 and December 2019.
Page | 141
The harmonisation of the design of national IGSs
3.2.1. Role and functions of IGSs
The majority of the existing schemes in Europe compensate policyholders for their losses in
the event of liquidation. Only three IGSs have other roles than compensating policyholders,
ensuring the continuation of insurance policies. In addition, EIOPA’s survey reveals that
eight IGSs have complementary roles, including acting as a temporary or resolution
administrator. Despite the fact that most of the existing schemes have a similar role EIOPA
stressed that the lack of any harmonised features governing the role and functioning could
still result in a situation of uneven levels of policyholder protection, in particular in cross-
border cases.
In terms of funding costs, as shown in table 8, the estimations provided by the model
developed by the Commission services tend to be slightly lower for IGSs that offer
compensation compared to IGSs that ensure the continuation of policies, in particular for the
non-life segment.
Table 8 – Funding needs for the EU 27 as per year-end 2018 under the home principle
Source: Joint Research Centre, European Commission
Million EUR
Continuation Principle Compensation Principle
Life Non-life Total Life Non-life Total
PD = 0.05%
Alpha 1% 6,585 802 7,285 6,338 456 6,732
Alpha 10% 996 125 1,112 958 71 1,028
Alpha 25% 282 36 318 272 20 294
PD = 0.1%
Alpha 1% 12,255 1,491 13,552 11,795 848 12,523
Alpha 10% 2,114 264 2,359 2,035 150 2,180
Alpha 25% 648 82 728 624 47 673
PD = 0.5%
Alpha 1% 48,435 5,888 53,539 46,615 3,346 49,474
Alpha 10% 11,636 1,441 12,948 11,199 819 11,965
Alpha 25% 4,344 546 4,861 4,181 310 4,492
This can be explained by the fact that, in the case of continuation, the model developed by the
Commission services assumes the need to provide an amount of capital requirements for the
policies that are continued (i.e. to recapitalise up to the level needed to ensure the
continuation of the policies) in addition to the situation of compensation140
. In addition, as
explained by EIOPA, in most of the cases, the compensation principle will only cover
outstanding policyholders’ claims at the time of default.
However, from the perspective of policyholder protection and taking into account the social
hardship that could be associated with the interruption of insurance coverage, the
continuation of policies might be more beneficial, especially for life or health policies and
annuities. In this perspective, EIOPA’s preferred option is that the role and functioning of
IGSs should be the continuation of insurance policies and/or compensation of policyholder
claims. EIOPA considers that the objective to protect policyholders in the event of insurance
140
See the technical report for further details about the calculation of the EAD used to determine the loss
amount to be covered
Page | 142
failures can be achieved in several ways. The optimal IGS intervention could depend on the
circumstances. For instance, the continuation of policies might be in the best interest of
policyholders for life or long-term non-life insurance policies, whereas the swift payment of
claims might be the better option in other cases.
Table 9 reproduces the evaluation of policy options that EIOPA performed and that supports
this conclusion.
Table 9 – Summary of policy options’ evaluations – Roles and functions of IGSs
The Commission services would support EIOPA’s Advice that both functions should co-
exist. On the one hand, the continuation of policies may be more relevant and appropriate in
the context of long-term contracts and considering the likely (increasing with time)
difficulties for policyholders to replace their policies (against similar conditions) with another
insurer. On the other hand, compensation tends to be more appropriate for short-term
contracts that would be substituted easily. However, as policyholders could suffer significant
losses if they have an outstanding claim at the time of failure, all non-life policies where
financial and social hardship cannot be expected to be manageable should also be covered.
3.2.2. Geographical scope
The geographical scope determines whether policies sold on a cross-border basis are covered
by the domestic IGS in a particular Member State. National IGSs could be operated based in
the home- or the host-country principle. The home country principle means that the IGS
covers only policies written by insurers established in the Member State of the IGS, including
those sold to policyholders in other Member States (outward). The host country principle
means that the IGS covers only policies of residents of the Member State of the IGS,
including those purchased from insurers in other Member States (inward).
Based on the information collected by EIOPA, nine IGSs are operated based on the host-
country principle, seven on the home-country principle and eight IGSs on a combined
approach. For the latter, it appears that one of the principles is usually dominant. In the
context of passporting, the absence of and the substantial differences in the design features of
existing IGSs, notably in terms of geographical coverage, results in gaps and overlaps that
have shown to undermine the credibility and integrity of the Single Market, including for
insurers. While holding the same type of insurance policy, policyholders might benefit from a
Page | 143
different level of IGS protection depending on where they live and where they have
contracted the policy.
EIOPA analysed the following options:
 Option 1 – Full discretion to Member States
 Option 2 – Home-country principle
 Option 3 – Host-country principle
 Option 4 – Host-country principle plus cooperation (incl. recourse) arrangements
 Option 5 – Home- plus host-country principle (combined approach)
The first option has been disregarded because it would not meet the main objective of
ensuring an even and comprehensive protection of policyholders across the EU. Setting
harmonised features for the geographical coverage of IGSs is essential to ensure that
policyholders in the EU are adequately protected and that the identified problems drivers are
addressed.
The main advantage of the home-country principle is that it aligns with – and reinforces – the
responsibility of the Home supervisor for the prudential regulation, supervision, resolution
and winding-up process of insurers. Under this option, the costs of a cross-border failure
would be borne by the industry of the Member State that was responsible for the supervision
of insurers that exported their policies and benefitted from EU-wide passporting. This
approach would enhance market discipline and incentives to monitor adequately exporting
insurers and thereby contribute to a greater confidence in the cross-border provision of
insurance services. It would also allow for a non-discriminatory system in which
policyholders of the same insurers, wherever their place of residence, are equally protected.
Finally, an important consideration supporting the home country principle highlighted in the
2010 White Paper is that the administration of an IGS is closely linked with rules regarding
insolvency and liquidation, which are under the responsibility of the Home Member State. In
the public consultation organised by EIOPA141
, most respondents supported the home
approach.
While a host-country principle would ensure that all policyholders in a given Member States
are evenly protected, regardless of the location of their insurer, it would require, in principle,
incoming insurers to participate in all domestic IGSs where they have operations. This could
duplicate administrative costs, as it would require insurers with cross-border business to take
part in two or more IGS. In addition, this option would not contribute to the alignment and
reinforcement of supervisory responsibilities and market discipline that would be achieved
under the home-country principle142
. This could further hinder the IGS intervention by
creating additional frictions. EIOPA notes that when the choice is made not to require inward
insurers to contribute, on the same terms than insurers in the host Member State, to the host
IGS, recourse against the IGS of the Home Member State of the failed insurance group where
it exists would be needed. The example of France that is provided by EIOPA in box 13.5 of
its background analysis shows the absence of recourse mechanism could result in a reduction
of coverage and a decrease in the overall protection provided to policyholders.
In terms of funding, the difference between the two approaches is shown in the following
tables. At EU level, the two approaches deliver broadly similar results. The difference is
141
https://www.eiopa.europa.eu/sites/default/files/solvency_ii/eiopa-bos-20-752-feedback-statement.pdf
142
A resolution authority or an administrator may focus on the interests of creditors and policyholders in their
own jurisdiction, e.g. by ring-fencing the capital instead of using it to cover capital shortages in other Member
States. Supervisors may have reduced incentives to supervise insurers that concentrate on freedom of
establishment and freedom of services if their jurisdiction does not bear financial responsibility in case of failure
of the insurer.
Page | 144
explained by the slightly different level of funding needs estimated by the model between the
cross-border activities that are imported (covered by the host-country based system) and
those that are exported (covered by the home-country based system).
The funding needs of a host-country based system for both life and non-life would be slightly
increased by some 0-1% compared with a home-country based system. However, the funding
needs of a host-country based system would be slightly reduced by some 0-1% compared
with a home-country based system if we consider non-life activities only.
Table 10 – Funding needs for the EU 27, Home IGS vs. Host IGS, compensation principle, 2018
Source: Joint Research Centre, European Commission
Million EUR
PD = 0.05% PD = 0.1% PD = 0.5%
75% 90% 99% 75% 90% 99% 75% 90% 99%
TOTAL HOME 294 1,028 6,732 673 2,180 12,523 4,492 11,965 49,474
HOST 294 1,028 6,735 673 2,181 12,529 4,494 11,971 49,497
Var.   -0.04%  -0.05% -0.05% -0.04% -0.05% -0.05%
LIFE HOME 272 958 6,338 624 2,035 11,795 4,181 11,199 46,615
HOST 272 961 6,352 625 2,039 11,821 4,190 11,224 46,720
Var.  -0.31% -0.22% -0.16% -0.20% -0.22% -0.21% -0.22% -2.22%
NON-LIFE HOME 20 71 456 47 150 848 310 819 3,346
HOST 20 71 455 47 149 845 310 817 3,337
Var.   -0.22%  +0.67% +0.36%  +0.24% +0.27%
Table 11 – Funding needs for the EU 27, Home IGS vs. Host IGS, continuation principle, 2018
Source: Joint Research Centre, European Commission
Million EUR
PD = 0.05% PD = 0.1% PD = 0.5%
75% 90% 99% 75% 90% 99% 75% 90% 99%
TOTAL HOME 318 1,112 7,285 728 2,359 13,552 4,861 12,948 53,539
HOST 318 1,113 7,288 728 2,360 13,558 4,863 12,954 53,564
Var.  -0.09% -0.04%  -0.04% -0.04% -0.04% -0.05% -0.05%
LIFE HOME 282 996 6,585 648 2,114 12,255 4,344 11,636 48,435
HOST 283 998 6,600 649 2,119 12,282 4,354 11,662 48,543
Var. -0.35% -0.20% -0.23% -0.15% -0.24% -0.22% -0.23% -0.22% -0.22%
NON-LIFE HOME 36 125 802 82 264 1,491 546 1,441 5,888
HOST 36 124 800 82 263 1,487 545 1,437 5,872
Var.  +0.81% +0.25%  +0.38% +0.27% +0.18% +0.28% +0.27%
The fourth option considered by EIOPA introduces the possibility to have a recourse to the
IGS of the home Member State of the failed cross-border insurer. However, this option
assumes that (a) there would be a Home IGS to which a recourse could be introduced and (b)
that the scope of coverage would be identical between the home and the host IGSs. The last
option considered by EIOPA is a combined approach. As for the preceding one, EIOPA
stresses the significant complexity added by this option. There seems to be no clear benefits
of these options in comparison to the home approach with a minimum harmonisation of the
IGS design.
An additional option, that was considered in the 2010 White Paper (see option 5.4), would be
to implement a harmonised IGS system that would only cover cross-border activities, i.e.
Page | 145
policies written and sold cross-border via branches and/or free provision of services. This
would address the specific problems that arise in the cross-border context and that were
illustrated by some of the recent cases of failure. National flexibility would be maintained for
the purely domestic business. In practice, however, such a solution is likely to create a
number of complications. First of all, an EU-wide IGS for cross-border business would not be
consistent with the existing national micro-prudential supervisory framework. Furthermore,
insurers with cross-border business would need to take part in both the cross-border scheme
and their national scheme. Uneven protection levels between and within Member States
would also continue, especially if domestic and cross-border business protection were
different. Overall, the funding needs for the EU under this option, considering the need for
adequate IGS protection at domestic level (i.e. mandating an IGS in all EU Member States),
are broadly the same. The funding needs for an EU-wide IGS covering cross-border
insurance activities being relatively limited as can be seen in the table 12.
Table 12 – Funding needs for the EU 27, cross-border IGS – exported business, compensation,
2018
Source: Joint Research Centre, European Commission
Million EUR
PD = 0.05% PD = 0.1% PD = 0.5%
75% 90% 99% 75% 90% 99% 75% 90% 99%
TOTAL 21 75 491 49 159 913 327 872 3,607
LIFE 19 69 455 45 146 846 300 804 3,345
NON-LIFE 2 5 34 3 11 64 23 61 251
Absent the domestic element, i.e. an IGS applicable only to insurers that sell insurance
services cross-border, the costs for the industry overall could be reduced. However,
policyholders living in a Member State without an IGS for its residents would only be
protected if their insurance policies are covered by an insurer from abroad, which contradicts
the objective of a minimum level of protection for all policyholders. In addition,
contributions to such a protection scheme could present a disincentive for conducting cross-
border business.
Table 13 reproduces the evaluation of policy options that EIOPA performed and that supports
this conclusion.
Table 13 – Summary of policy options’ evaluations – Geographical scope
Page | 146
Based on its analysis, Commission services would support EIOPA’s preference for the
home-country principle. In addition to the elements described above and the consistency
with the approach followed for DGS and ICS, this option would ensure that all policyholders
of a failing insurer would be enjoy the same scope and level of IGS protection irrespective of
their place of residence. However, this solution requires the minimum harmonisation of the
main IGS features for two reasons. If the level of protection through the IGS would be left
entirely to the respective Home Member State, the home country approach would be difficult
to accept for Member States that have currently chosen to establish an IGS based on the host
principle. This choice underlies the willingness to protect all their residents to the same scope
and level irrespective of where their insurer is established. Only option 2 with minimum
harmonised features would establish such a minimum floor of policyholder protection in case
of an insurer’s failure throughout the Single Market.
In terms of costs, the implementation of option 2 would represent a maximum of 13.6 billion
EUR for the entire EU143
, assuming an extensive scope covering all life and non-life policies.
Assuming a 10-year transition period to accumulate the financial resources of the IGS, this
estimated amount would correspond to an overall cost increase at EU-level for the industry
and policyholders of about 1.50 EUR per year on a yearly premium of 1,000 EUR.
3.2.3. Eligible policies
EIOPA analysed the following options as regards eligible policies.
 Option 1 – full discretion to Member States
 Option 2 – Life policies only
 Option 3 – Non-life policies only
 Option 4 – Both life and non-life policies
 Option 5 – Specific life and specific non-life policies
143
The sum of the individual funding needs per Member State could be slightly higher as they would not reflect
diversification effects that are inherent to the model. This result reflects a probability of default of 0.1% and a
confidence interval of 99%, meaning that in one loss event out of 100, the resources provisioned by the Fund
will not be sufficient to cover the incurred loss. This estimation depends on selected elements such as the
confidence interval, the assumed probability of default of insurers and the IGS design.
Page | 147
According to EIOPA, most of the existing IGSs are special schemes covering typically one or
two types of policies. Seven national IGSs cover a broad range of both life and non-life
insurance policies, whereas the other seven schemes cover only life or non-life policies. In
order to ensure a minimum level of equal protection of policyholders, EIOPA considers it is
essential to establish harmonised features for insurance policies eligible for IGS protection.
Option 1 would thus be disregarded, as it would not meet the main objective of an EU action.
Life insurance is characterised by long-term duration contracts with usually a savings or
retirement objective. The financial consequences for policyholders could be significant if
insurers cannot meet their contractual commitments on life policies, especially when they
rely on the pay-outs of their policies, for instance, for their retirement in the form of savings
or annuities. In addition, the typical long-term nature of life products in combination with the
likely difficulties for policyholders to find replacement (against similar conditions) makes
IGS protection essential.
As regards non-life insurance, most non-life insurance is characterised by short duration
contracts, which could easily be substituted. However, even if the average loss to
policyholders is generally smaller in the case of a non-life insurer going into default, there are
instances where losses to individual policyholders and third party claimants may well exceed
that of a typical life insurance product. Policyholders could also suffer significant losses if
they have an outstanding claim at the moment of failure.
Therefore, since substantial losses can be passed on to the holders of both life and non-life
policies, policyholders will receive a more complete and appropriate protection if the EU acts
to protect both types of policy – albeit in different ways and under different rules. However,
doubts exist, also in view of the comments of some stakeholders, on whether this full
coverage is entirely justified.
Table 14 reproduces the evaluation of policy options that EIOPA performed and that supports
this conclusion.
Table 14 – Summary of policy options’ evaluations – Eligible policies
The Commission services would support EIOPA’s advice that recommends IGS to cover
specific life and specific non-life policies. As EIOPA mentions that the protection for life
policies is essential to alleviate the potential severe financial and social hardship for
Page | 148
policyholders and beneficiaries all life policies should be covered. In the consultation that
EIOPA organised, the difficulty to appreciate fully the criteria of financial and social
hardship was stressed several times by stakeholders. In this perspective, leaving the discretion
of the definition of the scope of eligible policies to Member States based on these criteria
risks missing the main objective of EU action. Therefore, it might be preferable to establish a
minimum list of eligible non-life policies at EU level based on the list that EIOPA presents.
Member States would nevertheless maintain the flexibility to go beyond the specific range of
policies set at the EU level and extend the coverage to a broader range of policies.
In terms of funding, the definition of eligible policies would have a significant impact on the
costs for IGSs. Certain lines of business present higher costs than others and the possibility to
cover multiple lines of business could also create some pooling or diversification effects that
could be beneficial overall.
The following table presents the costs of funding per lines of business and on an aggregated
level for the entire EU for both the compensation and the continuation principles144
.
Table 15 – Funding needs per lines of business, Home-country principle, 2018
Source: Joint Research Centre, European Commission
This table provides an overview of the funding needs for an IGS at different level of granularity in terms of
eligible policies under the home-country principle and considering the two principles for IGS intervention, i.e.
compensation or continuation. The information is provided under the assumption of a probability of default of
0.1% and for different levels of security to be achieved by the IGS protection: 75% (alpha=25%) of failure
cases, 90% (alpha=10%) of failure cases and 99% (alpha=1%) of failure cases.
EU 27
(Million EUR)
Continuation Principle Compensation Principle
Alpha 1%
Alpha
10%
Alpha
25%
Alpha 1%
Alpha
10%
Alpha
25%
Total 13,552 2,359 728 12,523 2,180 673
Life 12,255 2,114 648 11,795 2,035 624
Annuities Health 60 10 3 59 10 3
Annuities Non-
health
20 3 1 20 3 1
Health Ins. 768 132 41 721 124 38
Index- and Unit-
linked
2,986 515 158 2,836 489 150
Profit Part. 7,627 1,316 403 7,417 1,279 392
Other Life 755 130 40 702 121 37
Non-Life 1,491 264 82 848 150 47
Credit/Surety 37 7 2 21 4 1
Fire/Property 382 67 21 199 35 11
General Liability 304 54 17 231 41 13
Income Protection 167 30 9 104 18 6
MAT 39 7 2 23 4 1
Medical Exp. 249 44 14 120 21 7
Workers Comp. 19 3 1 14 3 1
144
The figures presented in table 15 are in relation to a probability of default of 0.1%.
Page | 149
3.2.4. Coverage level
The coverage level determines the design and extend of protection provided to policyholders
and beneficiaries. Currently, national IGSs have varying coverage levels. Table 16 provides
some examples of the (maximum) coverage levels in place for some of the existing IGSs.
Table 16 – Coverage levels of existing national IGSs (excluding MTPL)
Source: EIOPA background analysis, European Commission
Country Coverage level Policies covered
BE EUR 100,000 per claimant Insurance with profit participation
BG
Approx. EUR 25,000 per injured person
Compulsory accident insurance of
passengers in the means of public
transport vehicles
Approx. EUR 100,000
Insurance with profit participation,
index-linked and unit-linked insurance
and other life insurance
DE Continuation principle with no specific limit Life and health policies
EL
 100% or maximum of EUR 30,000 per
claimant for life
 100% or maximum of EUR 60,000 for
death and permanent total disability
Broad range of life policies (survival,
death insurance, annuities, accident or
sickness, marriage and birth,
investment, health, etc.)
FI 100% of claims
Workers’ compensation insurance and
patient injuries insurance
FR
EUR 90,000 per claimant (health) Health insurance policies
EUR 70,000 per claimant (life) Life insurance policies
90% of the compensation to policyholders
Third party medical malpractice
liability
90% of the compensation to policyholders
Assurance “dommages-ouvrage”
(covers the construction of a new
building)
IT
 Approximately EUR 500,000 for each
accident
 Approximately EUR 400,000 for each
injured person
 Approximately EUR 100,000 for damage
to animals and property
Civil liability towards third parties
deriving from the use of weapons or
tools for hunting.
IE 65% or a maximum of 825,000 per claimant Broad range of non-life policies
LV
100% or maximum of EUR 15,000 per
claimant for life, 50% or maximum of
EUR 3,000 for non-life
Broad range of life and non-life
policies
MT
75% or maximum of approx. EUR 24,000 per
claimant
Broad range of life and non-life
policies
NO
90% or maximum EUR 2.1 million per
claimant
Broad range of life and non-life
policies
PL
EUR 30,000 but not more than 50% of the
claims
Broad range of life policies (life,
marriage and birth, unit linked,
Page | 150
annuity, accident and sickness)
100% of the claims up to the sum insured
Compulsory insurance for farm
buildings
100% of the claims up to a minimum amount
(EUR 5,210,000 for personal injuries per event
and EUR 1,050,000 for damages to property
per event)
Compulsory farmers third party
liability insurance
EUR 30,000 but not more than 50% of the
claims
Compulsory professional third party
liability insurances
RO
Approximately EUR 92,000 maximum per
claimant
All life and non-life policies
In determining the coverage level, an appropriate balance has to be found between, on the
one hand, the protection offered to policyholders and beneficiaries against an undesirable
level of financial or social hardship and, on the other hand, the overall costs of funding the
protection scheme.
In order to reach this balance, EIOPA recommends the following main elements to design the
minimum harmonised coverage system:
 100% of a certain amount (e.g. EUR 100,000) should be guaranteed for selected
eligible policies associated to social hardship (e.g. health, savings). Beyond this EUR
amount, a percentage cap of coverage level should be considered. EIOPA’s advice
and background analysis imply that this design would preferably apply to all life
policies.
 For other policies, the maximum coverage in terms of a percentage cap could apply145
.
EIOPA’s advice and the related background analysis imply that this design would
apply mainly to selected non-life policies.
 EIOPA also recommends a deductible amount should also be defined for the eligible
policies (e.g. EUR 100), which should act as a minimum threshold, below which no
eligible policy would be covered by the IGS. However, considering that most
insurance contracts already include a deductible amount, the definition of a
harmonised deductible amount would be an unnecessary complication in the design of
the coverage level. As the IGS intervention would reflect the terms of the contract
between the failing insurer and its policyholders, thereby defining the eligible claim,
the deductible amount of the contract will be reflected and should be sufficient to
prevent moral hazard behaviour on the side of policyholders or unjustified
administrative costs in comparison to the amount claimed.
EIOPA did not provide any quantitative analysis to help defining these different elements.
Absent available information on the distribution of claims in the Member States, it has not
been possible for the Commission services to provide estimations based on its model.
However, the Commission services ran a survey on the main features of current IGSs in the
context of its Expert Group on Banking, Payment and Insurance (EGBPI) meetings. As a
principle, IGSs would not cover more than the contractual obligations of insurers towards
their policyholders but they could cover less. The different thresholds could be set at a level
that could be regarded as a reasonable compromise between the currently applicable levels
across Member States that have one or more IGS(s) in place.
145
EIOPA notes that, in case of a continuation model, it may be that absolute caps are not needed. We
understand that it will depend on the sustainability of the costs associated with the implementation of the
continuation model (e.g. the importance of the haircut applied to policyholders’ claims, to be covered by the
IGS acting as a facilitator, in the case of a transfer).
Page | 151
Based on EIOPA’s recommendation and the results of its survey, the Commission services
considered the following options:
 Option 1 – determine a single minimum ceiling (e.g. EUR 100,000) across Member
States.
 Option 2 – determine a minimum ceiling and a percentage share for life, and only a
percentage share for non-life insurance.
Option 1 would be a simpler starting point for minimum harmonisation and would
correspond to the approach in several Member States as shown by the survey’s results and
EIOPA’s examples. However, a single minimum ceiling of EUR 100,000, for instance, could
still lead to significant social hardship in case significant damage remained uncovered, e.g.
for fire or civil liability insurance, in particular concerning uncovered claims of injured third
parties.
Option 2 reflects further EIOPA’s recommendation. In comparison to Option 1, this approach
remains simple and its additional coverage of a share of higher claims would make the
minimum harmonisation approach credible. Using the current maximum levels of coverage
achieved in Member States that already have an IGS in place and having in mind the need to
take account of the varying living standards, a harmonised share of 85% would seem
appropriate.
In conclusion, the Commission services would follow the structure recommended by
EIOPA and believe that Option 2 would be preferable.
3.2.5. Funding
3.2.5.1. Timing of funding
Based on EIOPA’s survey, a bit more than a third of existing IGSs are funded ex-ante while
slightly less than a third are funded ex-post and one third of existing IGSs are funded by a
combination of both approaches. The OECD made a similar observation in 2013146
.
Table 17 below summarizes the pros and cons of each approach as provided in EIOPA’s
background analysis. This overview confirms analyses made by both the OECD147
and the
IAIS148
in 2013.
Table 17 – Overview of the pros and cons between ex-ante and ex-post funding
Source: EIOPA’s background analysis
Advantages Disadvantages
Ex-ante funding
 Swift intervention
 Lower moral hazard
 Lower procyclicality
 Higher industry costs (addressed
with a transitional period)
 Higher management/operational
costs
 Investment risk
Ex-post funding
 Lower management/operational
costs
 No investment risk
 Reflects actual needs
 Higher moral hazard
 Higher execution risk
 Higher procyclicality
146
https://www.oecd-ilibrary.org/policyholder-protection-
schemes_5k46l8sz94g0.pdf?itemId=%2Fcontent%2Fpaper%2F5k46l8sz94g0-en&mimeType=pdf
147
See previous footnote.
148
https://www.iaisweb.org/page/supervisory-material/issues-papers/file/34547/issues-paper-on-policyholder-
protection-schemes
Page | 152
Ex-post
In an ex-post funded scheme, resources remain with the contributing institutions until a
failure occurs, and levies are paid to the scheme only once losses arise. It follows that set-up
and operational costs are limited and that the funds are collected based on actual needs (i.e.
outstanding claims). However, ex-post funding is more subject to moral hazard as failed
institutions never contributed to the IGS. This could incentivise insurance companies to adopt
less conservative and riskier practices in order to maximise their profits and extract values
from policyholders as they would not have to face the consequences of these inappropriate
behaviours. Furthermore, depending on the market circumstances and the degree of market
concentration, raising contributions following the failure of an insurer could potentially have
a pro-cyclical effect on the surviving share of the industry.
As summarised in table 17, the main advantages of ex-post funding are:
 A very low set-up and administrative costs;
 A lower cost for insurance undertakings as long as no failure occurs;
 Collected funds are tailored on actual default losses.
The main disadvantages are:
 A difficulty to ensure a prompt pay-out to policyholders without recourse to lending
by the IGS, which may not be feasible during a financial crisis, or to public funds;
 Failed insurance undertakings do not contribute to the loss caused by their failure;
 Funds are collected in a possibly more pro-cyclical way and the reliance on public
funds, could – in extreme cases – reinforce the sovereign-insurer loop149
;
 An uncertainty on the possibility to collect funds from the insurance industry
depending on the circumstances at the moment of the failure.
Ex-ante
In a pre-funded scheme, funds are raised in anticipation of possible future failures, with
resources transferred to, and managed by, the IGS via a system of levies on industry.
The first advantage therefore is the fact that money is readily available to protect
policyholders and beneficiaries should a failure occur. Moreover, ex-ante funding is less
subject to moral hazard problems because insurers that become insolvent will have already
contributed to the IGS150
. Finally, ex-ante funding is more likely to avoid the pro-cyclicality
associated with ex-post funded schemes. However, the set-up and operational costs tend to be
higher in a pre-funded scheme than in the case of ex-post funding. In addition, the investment
policy of the scheme should be adequately framed to ensure that the financial resources
remain available when needed.
As shown in table 17, the main advantages of ex-ante funding are:
 Funds are more quickly available to the IGS;
 Failed insurers contribute to the loss caused by their failure;
 Funds are collected in a possibly less pro-cyclical way.
The main disadvantages are:
 Higher set-up, administrative and operational costs.
149
See EIOPA Financial Stability Report of December 2019 for an analysis of the existing home-bias in
insurance.
150
This positive feature of ex-ante funded IGS can be reinforced by introducing ex-ante levies that are risk-
weighted.
Page | 153
Combination of ex-post and ex-ante funding
When part of the IGS funding is ex-ante and part is ex-post, some of the funds would be
immediately available to the IGS without imposing too high ex-ante costs / mobilization of
funds on industry and policyholders.
Table 18 reproduces the evaluation of policy options that EIOPA performed and that supports
this conclusion.
Table 18 – Summary of policy options’ evaluations – Timing of funding
The above analysis would support EIOPA’s advice that states that IGSs should be funded
on the basis of ex-ante contributions by insurers, possibly complemented by ex-post
funding arrangements in case of capital shortfalls and that further work is needed in
relation to specific situations where a pure ex-post funding model could potentially
work, subject to adequate safeguards. It would underpin the necessary trust that the home-
country approach will actually deliver the agreed protection and the complementary ex-post
funding arrangements, combined with an appropriate transition period to reach the target
level, could alleviate some of the concerns of those stakeholders opposed to a pure ex-ante
funding. However, the overall balance of the Solvency II review needs to be considered in
view of the additional costs for the industry. In this perspective, the choice of the timing of
funding may also need to reflect that some insurance products have more limited payout and
maturity profiles. This consideration may be suitable to balance adequately the interest of all
stakeholders involved and combine, as suggested by EIOPA, ex ante and ex post funding in
an appropriate manner.
3.2.5.2. Nature of contributions to IGSs
According to EIOPA, more than half of the existing IGSs collect flat-rate (fixed)
contributions while less than a third operate on the basis of variable-rate contributions. Only
one IGS currently uses risk-based contributions.
The main advantages of contributions based on a flat-rate in proportion to the size of
insurers’ business are the simplicity of the approach and the consistency with current
schemes.
Page | 154
However, while a flat-rate system distinguishes between insurers based on their volume of
activities, it does not account for different levels of conservatism in their investment policy or
underwriting risk-pricing approach. This could be conducive to moral hazard as the risks of
certain companies would ultimately be borne by others151
. This has been confirmed by the
2013 OECD analysis that considered that since non-risk-based premiums do not reflect the
riskiness of the insurer (i.e. riskier activities are not “penalised” by higher levies), they can
lead to a cross-subsidisation of funding among insurers participating in the scheme.
EIOPA is also of the view that a risk-based system would lead to a fairer allocation of costs.
In addition, a risk-based system would better incentivise insurers to manage their risks
adequately, including when insurance services are offered abroad, thereby contributing to a
system-wide strengthening of the insurance market and thus contributing to the overall
objectives of Solvency II.
The Commission services therefore would consider that a risk-based system of
contributions would be preferable.
As to the level of IGS contributions, EIOPA reports that half of the existing IGSs have some
type of upper limit on the annual level of contributions that can be raised from an individual
insurer or from the industry as a whole.
Considering minimum harmonisation, Member States could determine the level at which
insurance undertakings should contribute annually to the IGS funds, as long as the target
level is reached after a harmonised transition period.
3.2.5.3. Target level
IGS are designed to cover the most extreme losses that occur with a very low probability.
Assuming that IGS would be ex-ante funded, EIOPA is of the opinion that an appropriate
target level for the funding of IGSs should be defined across Member States (minimum level
of capital to be maintained in the scheme), taking into account the national market
specificities. This would ensure that IGSs have sufficient capacity to absorb losses. The table
19 below illustrates the choice in terms of target level.
Table 19 – IGS size/funding in terms of coverage of a risk of failure
Source: European Commission, White Paper, 2010
The vertical red line shows the cut-off point up to which a chosen level of IGS funding will be able to protect
policyholders from losses. The level of security (or confidence level) provided to policyholders, or the risk
appetite of the regulation, is determined in relation to the part (or, statistically, the percentile or “1-alpha” in
the model) of the IGS loss distribution that the IGS financial resources can cover. When the financial resources
are, for example, sufficient to cover the IGS loss distribution up to the, for example, 90th percentile, this
means that the level of security chosen avoids that losses are passed on to policyholders in 90% of the cases
possible. In other terms, it can also be said that if the financial resources cover the IGS loss distribution up to
the 75th ,90th, 99th percentile, the IGS is expected to have not enough resources and therefore pass losses onto
151
In addition, the academic literature provides ample evidence-based demonstration of the risk-shifting
behaviour of insurers in presence of a flat-rate IGS. Lee et al. (1997) for instance provide evidence that the risk
of stock insurers’ asset portfolios increases following enactments of a flat-rate ex-post IGS. Downs and Sommer
(1999) find that a flat-rate ex-post IGS induces stock insurers to take more risk, and furthermore that less
capitalized insurers are more likely to conduct risk-shifting. Lee and Smith (1999) find that the flat-rate IGS
induces insurers to lower their reserves and substitute IGS coverage for capital. In a theoretical study, Schmeiser
and Wagner (2010) find that in a competitive market setting, introducing a flat-rate ex-ante IGS entails a shift of
the insurer’s equity capital towards minimized solvency requirements, leading to higher insolvency
probabilities.
Page | 155
policyholders only every 4, 10, 100 years.
The target fund of an IGS would be influenced by many parameters, among which two
appear to be the most important: the probability of default (PD) of insurers and the level of
targeted security for policyholders. As has been set out above, the “average over-the-cycle”
PD for insurers used in the model were set at different levels ranging between 0.05% and
0.5%. Besides the probability of default of insurance undertakings, IGS funding needs are
mostly influenced by the level of security provided to policyholders and beneficiaries: the
higher the security provided by an IGS, the higher the required IGS funding needs. A key
decision would therefore be the level of security that an IGS is expected to provide to
policyholders.
The confidence level chosen should not only provide a high level of security for
policyholders and beneficiaries but also be financially realistic, i.e. it should have the
potential to achieve the objective of a sufficiently high protection of policyholders, without
requiring excessive resources. As in the 2010 White Paper, three funding levels are
considered: 75%, 90%, and 99%.
The following list of policy options (see technical report, tables 7 to 14 for an estimation of
the level of funding under various assumptions) can be drawn up with regard to the level of
IGS financial resources, taking into consideration both the probability of default of insurers
and the level of security for consumers:
 Option 2.1: No action (harmonization) at EU level
 Option 2.2: Harmonization at EU level
 Sub-option 2.2.1: Low risk, low security (PD=0.05%, percentile=75%)
 Sub-option 2.2.2: Low risk, medium security (PD=0.05%, percentile=90%)
 Sub-option 2.2.3: Low risk, high security (PD=0.05%, percentile=99%)
 Sub-option 2.2.4: Medium risk, low security (PD=0.1%, percentile=75%)
 Sub-option 2.2.5: Medium risk, medium security (PD=0.1%, percentile=90%)
 Sub-option 2.2.6: Medium risk, high security (PD=0.1%, percentile=99%)
 Sub-option 2.2.7: High risk, low security (PD=0.5%, percentile=75%)
 Sub-option 2.2.8: High risk, medium security (PD=0.5%, percentile=90%)
Page | 156
 Sub-option 2.2.9: High risk, high security (PD=0.5%, percentile=99%)
While option 2.1 is inconsistent with the objective of providing a high and even level of
protection to policyholders in all Member States, the choice between the various sub-options
in option 2.2 clearly depends on a cost-benefit analysis.
IGS cannot be pre-funded to a level necessary (nor should be constructed in the perspective)
to deal alone with the biggest failures, but their capacity to do so obviously increases when
financial resources are higher. An analysis of the funding needs of an IGS should also take
into account the annual costs that a certain funding may impose on the industry and on the
society, in case resources are anticipated but losses do not eventually materialise.
The estimated funding needs and costs (assuming a 10-year transition period) associated with
these options are summarized in table 20 below under various security and probability of
default assumptions for a home-country based system and a continuation principle. Results
remain broadly in line with those estimated in the 2010 White Paper.
Table 20 – Funding needs and costs under various security assumptions, Home Principle, 2018
Source: Joint Research Centre, European Commission
The yearly cost increase (in EUR), assuming a 10-year transition period, associated with each
assumption in terms of level of security are represented in parenthesis for a yearly premium of EUR
1,000. The percentile represents a desired level of security; it corresponds to 1-Alpha.
EU 27
(Million
EUR)
PD = 0.05% PD = 0.1% PD = 0.5%
Percentile 99% 90% 75% 99% 90% 75% 99% 90% 75%
Total
7,285
(0.81)
1,112
(0.12)
318
(0.04)
13,552
(1.50)
2,359
(0.26)
728
(0.08)
53,539
(5.93)
12,948
(1.44)
4,861
(0.54)
Life
6,585
(1.14)
996
(0.17)
282
(0.05)
12,255
(2.12)
2,114
(0.37)
648
(0.11)
48,435
(8.37)
11,636
(2.01)
4,344
(0.75)
Non-life
802
(0.25)
125
(0.04)
36
(0.01)
1,491
(0.46)
264
(0.08)
82
(0.03)
5,888
(1.82)
1,441
(0.45)
546
(0.17)
However, given the variability between individual markets, showing results based on EU 27
aggregates could not be sufficiently representative of the cost necessary to achieve a desired
level of comfort at Member States level. Table 21 below therefore presents the funding costs,
assuming a yearly premium of 1,000 EUR and a 10-year transition period, with reference to
the proportion of Member States that would reach the desired level of protection, assuming a
certain probability of default and a certain percentile. For the purpose of the presentation,
only the two higher percentiles (i.e. 99% and 90%) have been considered.
Table 21 – Share of Member States covered at a given cost of funding, Home Principle, 2018
Source: Technical report, table 7 –, European Commission
Each cell of the table represents the funding costs, under the continuation principle, for a yearly premium
of EUR 1,000, assuming a 10-year transition period, that is associated to (a) a certain probability of
default within the industry, (b) a level of security and (c) a proportion of Member States covered at the
desired security level. The corresponding estimates for the total funding needs in million EUR are
Page | 157
provided in parenthesis (see technical report, table 8).
EU 27 (EUR) PD = 0.05% PD = 0.1% PD = 0.5%
Percentile 99% 90% 99% 90% 99% 90%
Lines of
Business
Member
States
Total 75%
0.80
(7.2)
0.11
(1.0)
1.49
(13.4)
0.24
(2.2)
5.89
(53.1)
1.36
(12.3)
90%
1.08
(9.8)
0.15
(1.3)
2.02
(18.2)
0.32
(2.9)
8.02
(72.4)
1.70
(15.4)
MAX
1.24
(11.2)
0.16
(1.4)
2.33
(21.0)
0.35
(3.1)
9.28
(83.8)
2.00
(18.0)
Life 75%
1.21
(7.0)
0.16
(0.9)
2.26
(13.1)
0.37
(2.1)
9.95
(57.5)
2.03
(11.7)
90%
1.77
(10.2)
0.21
(1.2)
3.31
(19.1)
0.45
(2.6)
13.19
(76.3)
2.57
(14.9)
MAX
2.99
(17.3)
0.42
(2.4)
5.57
(32.2)
0.90
(5.2)
22.10
(127.8)
5.06
(29.3)
Non-life 75%
0.26
(0.8)
0.03
(0.1)
0.49
(1.6)
0.08
(0.3)
2.00
(6.5)
0.44
(1.4)
90%
0.47
(1.5)
0.05
(0.2)
0.89
(2.9)
0.11
(0.4)
3.65
(11.8)
0.64
(2.1)
MAX
0.61
(2.0)
0.08
(0.3)
1.14
(3.7)
0.17
(0.6)
4.54
(14.7)
0.98
(3.2)
Based on the estimations provided by its model, and the main objective of an EU action,
option 2.2.6 could be considered as an appropriate choice, which would ensure a high level
of protection under normal market conditions while equally ensuring a sufficiently high level
of protection in times of stress.
As shown in the table 21, the cost of funding implied by the choice of this option varies
according to the lines of business covered and the desired proportion of Member States that
would achieve the selected level of protection. In particular, selecting Option 2.2.6 would
mean that, at EU level, a minimum harmonised target level of around 2.33% of the Gross
Direct Written Premiums would ensure that all Member States (i.e. MAX) could protect
policyholders and beneficiaries for all business lines in 99% of the (yearly) default events if
the probability of default is 0.1%.
These funds could be seen as additional premiums that policyholders are paying to insure
themselves against the possibility that their insurance undertaking defaults. The payments
provided by policyholders can be considered to be roughly equivalent to the expected value
of the losses they would avoid in case their insurance undertaking defaults. This would
represent a yearly cost increase for policyholders of about EUR 2.49 for a yearly premium of
EUR 1,000.
The financial costs for the industry can be computed considering the Solvency II cost of
capital of 5% (in accordance with the proposed revision of the cost-of-capital rate for the risk
margin as part of this impact assessment). For an IGS with a level of funding of about 2.33%
of annual premiums, this would translate into financial (capital) costs of about 0.12% of
annual premiums.
Page | 158
However, the actual funding needs of Member States may vary and be lower than those
estimates, depending on the specificities of national insolvency frameworks, the possibility to
use alternative funding mechanisms and the use of certain resolution tools. These needs will
also depend on the final funding design, i.e. ex ante funding, ex post funding or a
combination of both. In particular, the choice of the funding structure may need to reflect that
some insurance products have more limited payout and maturity profiles. In addition, the
financial burden could be smoothened over a sufficiently long transition period in order to
maintain an acceptable yearly impact. Therefore, while prefunding with a minimum
harmonised target level may increase the trust of all stakeholders in the credibility of a
framework based on the home country principle, the design of the funding model could
ultimately contribute to ensure the overall balance of the proposal.
3.2.6. Eligible claimants
According to EIOPA, 13 of the existing national IGSs provide protection to natural persons
solely, 11 schemes extend coverage to natural and micro- and small-sized entities and two
IGSs cover all natural and legal persons.
Covering all natural and legal persons might be excessively expensive. It may also not be
fully justified because of the main objective of IGS, i.e. the protection of retail customers. In
order to reduce funding needs, eligibility could be restricted to those claimants who meet
certain criteria.
One possibility is to restrict IGS protection to natural persons only (i.e. policyholders,
beneficiaries and third parties). However, this might raise concerns about inadequate
protection for legal persons that resemble retail customers.
Another possibility might be to extend IGS protection to include also selected legal persons
that resemble retail consumers, such as micro-sized entities. The meaning of micro-sized
entities would be the one defined by the European Commission152
.
This option would exclude SMEs and large corporate policyholders from IGS protection.
SMEs and large corporates are better equipped to make an informed judgement on the
financial soundness of insurers and have a greater capacity to manage their risks, for example
by diversifying their risks by purchasing policies with various insurance companies or seek
other forms of protection. EIOPA specifies however that, in order to avoid social hardship,
the related beneficiaries or third parties – understood to be natural persons or micro-sized
entities – of a company that is not protected by an IGS should still have the right to claim for
compensation to the IGS, for example in case of a work accident, professional liability
insurance or an airplane crash.
The Commission services believe that based on EIOPA’s analysis and advice the main
objective of an EU action would adequately be met by covering natural persons and micro-
sized entities. As the above estimations of funding needs are considering all types of
policyholders153
, the preferred scope will also contribute to constrain the possible costs of an
EU action and would possibly reduce the final funding needs of Member States.
152
See Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-
sized enterprises.
153
For reasons of data availability, it is not possible to consider the different types of policyholders in the model
developed to estimate the funding needs of an IGS.
Page | 159
4. ARE THERE ALTERNATIVE TO SPECIFIC EU ACTION ON IGS?
The importance of introducing an IGS depends on the risk of failure of insurance companies
and the potential impact that such failures could have on policyholders. This raises the
question as to what alternative protection mechanisms are available at national or at European
level to mitigate the risk of insurance failure or to reduce the losses for policyholders if the
risk materialises.
 Prudential regulation and risk management: Solvency II provides for a risk-based,
economic approach to solvency. It requires insurance and reinsurance undertakings to
hold sufficient capital to cover their obligations over a 1-year time horizon subject to
a 99.5% VaR confidence level. This should ensure that, during any given year, the
failure of an insurer occurs no more often than once in every 200 cases. Effective risk
management and comprehensive governance structures are cornerstones of the
solvency system, in addition to capital requirements and appropriate supervisory
powers of varying degrees of intensity. In spite of the many safeguards contained in
Solvency II, it cannot ensure a zero-failure regime. It is widely acknowledged that it
would be too costly to set solvency requirements at a level that would be sufficient to
absorb all unexpected losses.
 Preferential treatment of policyholders in winding-up proceedings: in the event of the
winding up of an insurance undertaking, the current EU winding-up legislation offers
Member States a choice between two alternatives in national law for giving priority
treatment to insurance claims over other creditors of the insurer in liquidation154
.
However, reliance on winding-up proceedings may not be workable in practice, and
experience has demonstrated this. Firstly, there may not be a sufficient amount of
assets for the protection of policyholders, in particular when the insolvency would
occur during a financial crisis. In the absence of loss mutualisation, this gives rise to
uncertainty over whether policyholders can in all cases be compensated. Secondly,
winding-up proceedings of insurance undertakings are not only complex but also
expensive and time-consuming. This may create serious social hardship linked to
liquidity shortages for policyholders with outstanding claims at the time of
insolvency, if their claims cannot be satisfied within a reasonable period of time.
Furthermore, in order to facilitate claim handling for policyholders, beneficiaries and
third parties that reside in other Member States than that of the insurer that can no
longer cover claims, a cross-border mechanism between IGS is needed. Dealing with
insolvency procedures and insolvency administrators in other Member States has
proven to be a challenging task for the envisaged eligible claimants.
However, the choice made by certain national systems to give priority treatment to
insurance claims over other creditors of an insurer in liquidation as well as the
possibility for the IGS to benefit from a priority on the insolvency estate could
influence the design of the national IGS in particular its funding structure, insofar they
are considered as complementing the IGS framework in terms of policyholder
protection.
 Case-by-case government intervention: case-by-case solutions such as ex-post
government interventions, while by their nature flexible, also have serious drawbacks.
Unequal interventions may raise concerns regarding fairness and transparency, as
relevant decisions are made on an ad-hoc basis rather than according to a set of pre-
designed rules. In addition, case-by-case intervention may be perceived as privileging
larger undertakings thereby incentivising risk and creating moral hazard through the
154
Article 275 of Solvency II.
Page | 160
assurance of safety nets for which others have to pay. Ad-hoc interventions may
create uncertainty both for policyholders and, depending on their financing, for
taxpayers and the industry.
 Additional information and enhanced transparency: Approaches which enhance
transparency and information requirements seek to strengthen policyholders' capacity
to choose the most appropriate insurance product for themselves. These approaches
rely on the assumption that relevant information is properly understood and
incorporated in the decision-making process of policyholders. Particularly in Member
States where the policies of domestic and incoming insurers are subject to different
levels of IGS protection, enhanced information may in principle alleviate concerns
about consumer protection within Member States. However, it is highly unlikely that
policyholders are capable of understanding and processing all relevant information,
particularly with regard to cross-border insurance business. Moreover, additional
information does not alone address the issue of the differential consumer protection
between different Member States and the fragmented IGS landscape within the EU as
such, i.e. the lack of IGS in many Member States.
5. CONCLUSIONS
The present annex provides evidence supporting the need for a legally binding EU solution
on IGS protection based on minimum harmonization in order to ensure that IGS exist in all
Member States and that they comply with a minimum set of design features. Based on the
analysis contained in this Annex, the Commission services’ preliminary preferences with
regard to the IGS design features would be the following:
 Level of harmonisation: the Commission services would recommend introducing an
IGS in all Member States, subject to minimum design features, because this is
consistent with the existing national micro-prudential supervisory framework;
 Role and function: the Commission services believe that the role of an IGS should be
that of solely acting as a last resort protection mechanism in order to avoid as much as
possible moral hazard problems in the behaviour of insurance undertakings and
possible state aid issues. Portfolio transfers where they are reasonably practicable and
justified in terms of costs and benefits would be the preferable solution. However,
when all other means are exhausted, IGS should compensate losses of policyholders
and beneficiaries;
 Geographical scope: in the Commission services' view, the home state principle
would be the preferable policy option, especially because of its consistency with the
existing supervisory framework;
 Eligible policies: the Commission services would recommend to cover all life policies
and selected non-life policies as this strikes the right balance between ensuring a
sufficiently large and solid protection of consumers on the one hand, and limiting
costs on the other hand;
 Eligible claimants: the Commission services believe that covering natural persons
and selected legal persons (i.e. micro-sized entities) would be the best way to strike
the right balance between ensuring a sufficiently large and solid protection for
consumers on the one hand, and cost efficiency on the other hand;
 Coverage level: the Commission services would prefer to cover all life policies at a
minimum absolute level of 100,000 EUR combined with a harmonised coverage share
of 85% of claims resulting from eligible life and non-life policies.
 Timing of funding: the Commission services would prefer ex-ante funding which
could be complemented by ex-post funding where necessary. This would ensure the
Page | 161
immediate availability of funds while limiting costs to industry and consumers and
foster the level-playing-field;
 Nature of contributions: the Commission services believe that, for the ex ante part of
the funding design, risk-based contributions would ensure an adequate structure of
incentives, address potential moral hazard and ensure the fairness of levies on the
industry. The level of the contributions would be left to the discretion of the Member
States, considering a harmonised target level and an adequate transition period.
 Target level: Conscious of the balance between a high degree of policyholders’
protection and the need to maintain costs for the industry and the society at an
acceptable level, the Commission services would suggest setting a harmonised target
level for both life and non-life businesses between 2.30% and 2.50% of the GDWP,
depending on the scope of eligible policies, to be reached over a transition period of
10 years.
Page | 162
ANNEX 6: ANALYTICAL METHODS
We refer to the Joint Research Centre (JRC)’s technical report entitled “Insurance Guarantee
Schemes: quantitative impact of different policy options”155
. In this report, and at the request
of DG FISMA, the JRC assesses the size of losses due to defaults in the EU insurance sector
and estimates the amount of funding needs for each IGS.
155
https://publications.jrc.ec.europa.eu/repository/handle/JRC124577
Page | 163
ANNEX 7: IMPACT ASSESSMENT OF TECHNICAL TOPICS THAT WERE
NOT EXPLICITLY COVERED BY THE MAIN BODY OF THE IMPACT
ASSESSMENT
Some technical topics have not been explicitly covered by the main body of the impact
assessment. For this reason, those topics are subject to a dedicated impact assessment in this
annex, leveraging on EIOPA’s own impact assessment.
1. SAFEGUARDS IN THE USE OF INTERNAL MODELS
The supervision of internal models has not been explicitly covered as part of the problem on
the deficiencies in the supervision of insurance companies and groups (fourth problem of the
main body of the impact assessment).
Solvency II allows that supervisors approve the use of a partial or full internal model for the
calculation of the solvency capital requirement. At the end of 2019, insurance companies
using a partial or full internal model made up around 32% of the EEA insurance market in
terms of insurers’ liabilities towards policyholders156
. Insurers that use an internal model
must ensure that it captures all of the material risks to which the insurer is exposed. In that
context, Solvency II prohibits that Member States and supervisory authorities prescribe
methods for the calibration of internal models.
Problem definition
While the methodological freedom for internal model calibration allows to capture very
specific risks and to reflect the particular situation of a company, it also implies that insurers
can use very different methods the outcomes of which are difficult to compare. Due to this
lack of comparability, the supervision of insurance companies that use an internal model is
more demanding as the “[interpretation] of [internal model] figures depends heavily on
[supervisory authorities’] knowledge of the internal models they supervise as well as the risk
profile of the supervised undertakings or groups”157
. Likewise, the comparison of prudential
disclosures by insurers is more difficult where at least one insurer uses an internal model than
if this was not the case. Against this background, EIOPA conducts regular comparative
studies, because it is of the view “ that national supervisors […] need tools, such as European
comparative studies, to be provided with a necessary overview of model calibrations“158
.
Furthermore, there are 63 insurers and nine insurance groups that used internal models at the
end of 2019 and also modelled the impact of spread scenarios on the volatility adjustment
(“dynamic volatility adjustment”)159
. In such cases, the volatility adjustment will increase in
scenarios of spread increase and thereby compensate for some or all of the solvency capital
requirement that can be attributed to spread risk. Section 2.2 describes that the current
volatility adjustment can lead to “overshooting” of spread widening in the determination of
prudential capital resources. In fact, three insurers using an internal model reported
observations of overshooting of the volatility adjustment to EIOPA160
. Internal models that
integrate a dynamic volatility adjustment could lead to an extension of the overshooting
effects from the prudential capital resources to the capital requirements calculation.
156
EIOPA: Report on long-term guarantees measures and measures on equity risk 2020 (link), page 18
157
See EIOPA, Opinion on the 2020 review of Solvency II – Analysis, December 2020 (link), paragraph 7.66
158
See EIOPA: Market and Credit Risk Comparative Study YE2019 (link), page 4
159
See EIOPA, Opinion on the 2020 review of Solvency II – Analysis, December 2020 (link), paragraphs 2.347
and 2.348
160
See EIOPA, Opinion on the 2020 review of Solvency II – Analysis, December 2020 (link), paragraph 2.363
Page | 164
What are the available policy options?
Option label Option description
Option 1: Do nothing
on internal model
safeguards
This is the baseline. Do not require the calculation of standard
formula results and keep case-by-case approach as regards the
integration of the dynamic volatility adjustment in internal
models
Option 2: Improve
supervisors’ access to
standardised
information and impose
safeguards in the
modelling of the
volatility adjustment
Under this option, users of internal models would be required to
also report their capital requirements calculated with the standard
formula to supervisors. In addition, Option 2 would impose
safeguards where an internal model integrated the dynamic
volatility adjustment. This is in line with EIOPA’s advice.
Option 3: Limit the
overall impact of
internal models
Require a disclosure of the SCR calculated with the standard
formula and prohibit the use of the dynamic volatility adjustment
What are the impacts of the options and how do they compare?
Only a high-level impact assessment of the options is provided, as EIOPA assessed the
options in detail161
.
1.3.1. Option 1: Do nothing on internal model safeguards
This is the baseline scenario in relation to internal models. Under Option 1, no change would
be made to the prudential rules as regards internal models. Therefore, Option 1 would not
address the issue of a lack of comparability of SCR figures and a potential overshooting from
the volatility adjustment in the SCR calculation. On the one hand, users of internal models
have argued for maintaining the current framework in order to allow insurers to align internal
models as closely as possibly with their idiosyncratic risks. On the other hand, several
supervisory authorities, EIOPA and the ESRB have lamented the lack of comparability of
results from internal models.
1.3.2. Option 2: Improve supervisors’ access to standardised information and
impose safeguards in the modelling of the volatility adjustment
Under option 2, insurance companies that use an internal model for the calculation of capital
requirements would be required to calculate, in addition, the capital requirements with the
standard formula and report the outcome to supervisors. Furthermore, safeguards would be
put in place where an internal model integrated the dynamic volatility adjustment. The
safeguards would aim to avoid amplification of overshooting from the volatility adjustment in
capital requirement calculations.
Benefits
Option 2 would provide supervisors with more comparable data thanks to the standard
formula calculation, which provides a uniform reference. Supervisors could check the
plausibility of the internal model against the standard formula calculation and they could
compare companies better against their peers. Furthermore, the option would also establish a
common safeguard against amplification of a possible overshooting of the volatility
adjustment and thereby avoid a reduction of capital requirements that is not commensurate
161
See EIOPA, Opinion on the 2020 review of Solvency II – Background impact assessment, December 2020
(link), sections 2.4 and 8
Page | 165
with the risks. Option 2 would therefore enhance the quality and the consistency of
insurance supervision.
Option 2 would also better address the potential build-up of systemic risk in the insurance
sector. Thanks to the uniform reference provided by the standard formula calculation,
supervisors would also be able to form a better view the sector as a whole and detect more
effectively the potential build-up of systemic risks.
Costs
Option 2 would result in hard to estimate one-off and on-going implementation cost.
Insurers using an internal model would have to put in place the processes for the calculation
of the standard formula and, additionally for insurers using the dynamic volatility adjustment,
the additional calculations required under the new safeguard. Given the large degree of
flexibility for internal models and their potentially large impact on insurers’ financial
position, the implementation cost seems acceptable.
Option 2 would lead to a limited increase in capital requirements. While the additional
calculation of the standard formula would not affect the level of capital requirements, EIOPA
estimates that the safeguard would increase capital requirements of companies using the
dynamic volatility adjustment by around € 5 billion162
.
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would achieve improved safeguards in the
use of internal models while causing reasonable costs. In particular, the option would not
imply any material cost with respect to the strategic objectives for this review.
Winners and losers: Supervisors and policyholders are winners under option 2. Supervisors
would have access to more comparable information and be better able to detect company-
specific and systemic risks. This would also benefit the protection of policyholders. Both
would benefit from safeguards that avoid an amplification of the overshooting of the
volatility adjustment. To the contrary, insurers would be losers under option 2. The
safeguards on the dynamic volatility adjustment would result in limited increases of capital
requirements. Additionally, those safeguards and the standard formula calculation for
reporting to supervisors would result in implementation cost.
Stakeholder views: During the public consultation, half of the respondents from the category
of public authorities expressed support for a requirement on internal model insurers to report
to supervisors standard formula calculations. Only around 10% of the respondents from the
insurance industry supported such a requirement.
1.3.3. Option 3
Under Option 3, insurers which use an internal model would not only be required to report
standard formula results to the supervisors, but also to disclose such information to the
general public. This would be in line with the ESRB’s recommendation. In addition, in view
of the technical deficiencies of applying the dynamic volatility adjustment in capital
requirements, Option 3 would imply prohibiting such use.
Benefits
Similar as Option 2, Option 3 benefits the quality, consistency and coordination of
insurance supervision by a requiring a disclosure of standard formula calculation.
Furthermore, the uniform prohibition of the dynamic volatility adjustment would remove any
162
See EIOPA, Opinion on the 2020 review of Solvency II – Background impact assessment, December 2020
(link), page 53
Page | 166
possibility of an amplification of overcompensation from the volatility adjustment in the SCR
and not allow for diverging supervisory practices.
Similar as Option 2, Option 3 would address the potential build-up of systemic risk by a
requiring a disclosure of standard formula calculation. Furthermore, the uniform prohibition
of the dynamic volatility adjustment would remove any possibility for the build-up of
systemic risk through an amplification of overcompensation from the volatility adjustment in
the SCR.
Costs
By imposing the disclosure of standard formula calculations, Option 3 might result in
pressure on insurance companies to base their decisions to a lesser degree on the outcome of
the internal model and more on the standard formula calculation163
. That pressure may lead to
a cost on risk-sensitivity as internal models are intended to capture better than the standard
formula the particular risks that an insurer is exposed to.
While the impact on capital requirements of the dynamic volatility adjustment itself is not
disclosed, insurance company’s disclosures on the impact of the volatility adjustment can be
compared. The removal of the volatility adjustment would, at the end of 2019, have
decreased solvency ratios by 25% on average over all EEA companies applying the volatility
adjustment164
. The average decrease in solvency ratios for the sub-sample of companies
applying the dynamic volatility adjustment would have been 47%165
. The much higher impact
in that sub-sample can be assumed to be largely driven by the reduction of the solvency
capital requirements caused by the dynamic volatility adjustment. Option 3 can therefore be
assumed to increase significantly the capital requirements for companies currently applying
the volatility adjustment.
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would achieve the most effective
safeguards in the use of internal models. However, the option would result in large costs with
respect to both capital requirements and strategic objectives. In particular, the option might
be harmful for risk-sensitivity which was one of the main objectives of the introduction of
internal models.
Winners and losers: Neither supervisors nor policyholders are clear winners or losers under
option 3. While both would have access to comparable standard formula calculations, the
option may also incentivise decision-making on the side of the insurer that is not fully
reflective of the company’s risks. Insurers would be losers in two ways under Option 3. First,
the removal of the dynamic volatility adjustment would result in significantly higher
increases of capital requirements than Option 2. Second, the disclosure of standard formula
calculations would result in pressure to manage the company with respect to those results.
That would undermine the benefits of having developed costly internal models.
Stakeholder views: During the Commission’s public consultation, around 59% of the
respondents from the insurance industry and half of the respondents from the category of
public authorities opposed a requirement on internal model insurers to calculate the standard
formula. None of the respondents from that category supported a requirement to publicly
disclose such calculations. However, supervisory authorities approved EIOPA’s proposal to
require such disclosure. This proposal is also supported by the ESRB. Consultation responses
from the category NGOs, consumers and citizen expressed either supported a requirement for
163
This might undermine the so called “use test” required under Article 120 of the Solvency II Directive.
164
EIOPA, “Report on long-term guarantees measures and measures on equity risk 2020”, December 2020
(link), p. 79
165
Ibid., p. 88
Page | 167
public disclosure (60%) or indicated no opinion (40%). Safeguards as regards the dynamic
volatility adjustment were supported by supervisory authorities via EIOPA’s Board of
Supervisors. Insurance companies that are using the dynamic volatility adjustment have
expressed concerns on the complexity and the limitations on the alignment of the internal
model with a company’s specific circumstances.
1.3.4. Summary
Effectiveness
Efficiency
(Cost-
effectiveness
)
Coherence
LT
green
financin
g
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financi
al
stability
Option 1 0 0 0 0 0 0 0 0
Option 2 0 0 0 0 ++ ++ +++ ++
Option 3 0 -- - 0 + ++ -- --
Summary of winners and losers
Insurers Policyholders
Supervisory
authorities
Option 1 0 0 0
Option 2 - ++ ++
Option 3 --- +/- +/-
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Option 2 appears to be the most suitable option. While Option 3 would be the most effective
in establishing safeguards in the use of internal models, the cost of those safeguards seems
unreasonably high. Moreover, Option 2 would not result in any costs with respect to the
specific objectives whereas Option 3 might undermine risk-sensitivity and therefore be
incoherent with the principal objectives of internal models. Option 2 is therefore considered
much more effective and coherent than Option 3. Finally, Option 2 is also preferred over the
baseline Option 1 as it is effective without implying unreasonable cost.
2. REPORTING AND DISCLOSURE REQUIREMENTS
Background and problem definition
Rules governing improved reporting (to public authorities) and disclosure (to the public) of
prudential information could be implicitly considered covered as part of the problem on the
deficiencies in the supervision of insurance companies and groups (fourth problem of the
main body of the impact assessment).
The reporting burden has been identified as an important issue for the insurance industry,
which calls for an ambitious streamlining of the requirements and a significant relief in terms
of data quantity and deadlines of submissions. Those concerns have been corroborated by the
Page | 168
conclusions of the Fitness check on supervisory reporting166
. However, the supervision of a
very sophisticated risk-based system of capital requirements as Solvency II requires frequent
and extensive regular reports. Therefore, a material reduction in reporting requirements could
jeopardize the quality of supervision, and supervisors may try to circumvent this limitation by
imposing at national level more frequent ad-hoc reporting. Still, the reporting framework
could better take into account the new category of “low-risk profile insurers” that would be
introduced in order to address the problem of insufficient proportionality of the current
prudential rules generating unnecessary administrative and compliance costs.
In addition, the information disclosed to the public is very detailed and granular, but may not
be fit for purpose. For financial experts (analysts, etc.) detailed and high-quality information
is deemed crucial, but the current set of information is not necessarily always comparable
between the largest insurers and insurance groups, notably because insurers do not
necessarily disclose in the same manner their exposure to different risk drivers (lack of
harmonisation of sensitivities of solvency ratios to different market drivers). For
policyholders, information in SFCRs may not be easily understandable. According to the
German insurance Association (GDV), in 2018, German SFCRs were downloaded on
average 33 times per month during the first months following their publication167
.
Finally, while reporting and disclosure is an important source of information for stakeholders,
there is no requirement at EU level ensuring the accuracy of the information provided,
although 17 Member States impose at national level some audit requirements with different
scopes (balance sheet only, balance sheet and capital requirements, etc.).
The review of the rules that govern the data collection to supervisory authorities is a key part
of EIOPA’s advice. However, EIOPA’s work in this area goes beyond the sole review of the
Solvency II Directive and the Delegated Regulation and encompasses:
1. Proposals to amend rules of the Solvency II Directive and Delegated Regulation
governing the frequency and quality of reporting and the general structure and content
of narrative reports (regular supervisory report to the NSA and SFCR that is publicly
disclosed);
2. Review of Quantitative Reporting Templates (i.e. the templates of granular
quantitative information that insurers should submit to public authorities). Those rules
are laid down in implementing technical standards on reporting and disclosure and in
parallel to the Solvency II Review. EIOPA intends to make proposals of amendments
to those with the aims of i/ ensuring that the information requested is necessary, fit-
for-purpose and up-to-date to support efficient supervision by public authorities, ii/
checking whether information that may be important for the supervisory review
process is not missing and iii/ reviewing the scope of insurers that need to report
certain data taking into account the extent of their exposures to certain risks (e.g. only
insurers with exposures to derivatives above a certain threshold – to be defined by
EIOPA – would be required to fill in the relevant reporting template on derivatives)
3. More forward-looking activities that go beyond Solvency II and aims at developing a
reporting system that is more efficient by reducing the number of data requests and
avoiding overlaps between reporting obligations of different existing frameworks.
This annex will discuss Point 1 only. Point 2 is a prerogative of EIOPA and will follow a
parallel process to the review of the Solvency II Directive and Delegated Regulation. Finally,
in relation to Point 3, and in line with the Digital Finance Strategy, the Commission services
166
Of all the sectors, insurers/re-insurers spent the greatest share of their one-off and ongoing-costs on
supervisory reporting costs (respectively 38% and 36% on average), closely followed by financial markets (37%
and 28%), page 205 of the Fitness Check of EU Supervisory Reporting Requirements, November 2019
167
See https://www.gdv.de/resource/blob/51928/c30fa2bb32711d7edb699e5b163ebafb/reporting-2-0---eiopa-
vorschlaege-mit-korrekturbedarf---download--en--data.pdf
Page | 169
intend to mandate EIOPA to further analyse the necessary legislative and regulatory
amendments in order to clarify and facilitate the use of data already reported within other
European reporting frameworks to competent authorities, both national and European ones.
This would help avoid redundant reporting requirements for insurers. EIOPA identified two
areas where the sharing of information between competent authorities should be prioritised:
derivatives and collective investment undertakings168
. In any case, further work is needed to
eliminate duplications, inconsistencies, and to enhance the “re-use” of data requested in
accordance with other frameworks, and/or collected by other authorities.
EIOPA’s proposals in relation to Solvency II can be summarised as follows:
- Improve the quality of the information disclosed to the public: EIOPA puts forward a
new structure for the SFCR, with a part addressed to policyholders (including simple,
clear and meaningful information to non-expert readers), and another one, more
detailed, addressed to financial market participants and other financial experts. The
latter part includes the publication of some fundamental reporting templates, among
which is the Solvency II balance sheet.
- Improve the reliability of the information submitted to supervisory authorities and
disclosed to the public: EIOPA recommends introducing a new requirement to audit
the Solvency II balance sheet in all Member States, for both individual insurers and
insurance groups. However, in order to counterbalance the additional regulatory and
compliance costs generated by this requirement, EIOPA also proposed an extension of
two weeks of the deadline for the submission of the annual reporting package and an
extension of four weeks for the publication of the SFCR.
168
Collective investment undertakings means a UCITS as defined in Article 1(2) of Directive 2009/65/EC of the
European Parliament and of the Council or an AIF as defined in point (a) of Article 4(1) of Directive
2011/61/EU of the European Parliament and of the Council.
Page | 170
What are the available policy options?
Option label Option description
Option 1: Do
nothing on
reporting and
disclosure
This is the baseline scenario in relation to reporting and disclosure
Option 2:
Improve quality
of reporting and
disclosure but
extend reporting
deadlines
In line with EIOPA’s advice, Option 2 would imply
- improving accuracy of information provided by introducing an
audit requirement of the Solvency II balance sheet;
- alleviating some regulatory burden, by extending the deadline for
annual reporting by two weeks and the deadline for disclosure by
four weeks
- improving the readability of the SFCR: split the report with one
section targeting policyholders and another one for financial
experts which should include, in addition to current requirements,
sensitivity analyses for the largest insurers.
Option 3: Go
further than
EIOPA in order to
reduce regulatory
burden for low-
risk profile
insurers169
Same as in Option 2, but with the following proportionality measures:
- the audit requirement would not apply for low-risk profile
insurers;
- the publication of a full SFCR by low-risk profile insurers would
only be required every other three years (a simplified SFCR would
only be required when the full report is not published)
Options discarded at an early stage
Similarly to the extension of annual reporting deadlines, the Commission services have
considered extending reporting deadlines for quarterly reporting (currently set at five weeks
following the end of the quarter). While this could in theory represent a material alleviation
of regulatory burden to insurers, such an approach would however be in conflict with the
reporting deadlines for statistical reporting to the European Central Bank (currently, five
weeks as well), as laid down in its Regulation (EU) No 1374/2014. Recital 10 of this
Regulation even indicates that the European Central Bank will consider reducing further
quarterly reporting deadlines down to four weeks. Therefore, any extension of reporting
deadlines in Solvency II would prove to be ineffective if the same information is subject to
shorter deadlines in accordance with the ECB Regulation and has to be submitted to public
authorities.
In addition, Solvency II provides that public authorities may waive or reduce the scope of
quarterly reporting for up to 20% of each national market. However, there is no obligation to
implement such waivers or limitations of quarterly reporting requirements. EIOPA has
assessed whether there is a need to impose for each authority to waive or limit reporting
requirements for at least 5% of each national market. However, EIOPA’s impact assessment
concludes that the costs and risks associated with such waivers off-set the potential benefits
in terms of reduction of reporting requirements. The Commission services agree with
EIOPA’s assessment, and therefore have not re-assessed this possibility. In addition to the
arguments put forward by EIOPA in its impact assessment, such an approach could once
more be in conflict with reporting requirements imposed by the ECB Regulation (EU) No
169
This concept is further explained in Sub-sections 6.3.1 and 6.3.2 of the Impact Assessment
Page | 171
1374/2014. Indeed, according to Recital 10, the ECB will assess the merits of increasing the
coverage of quarterly reporting from 80% to 95%. If such a change were to be implemented,
the maximum scope of exemptions and limitations would be 5% of each national market,
which would contradict any attempt in the context of Solvency II to introduce mandatory
waivers / limitations for at least 5% of national markets170
.
Note however that in the context of the problem of insufficient proportionality of the current
prudential rules generating unnecessary administrative and compliance costs, the preferred
option is Option 3 (“Give priority to enhancing the proportionality principle within Solvency
II and make a lower change to the exclusion thresholds”). This Option introduces a concept
of low-risk profile insurers which would benefit from the automatic application of
proportionate Solvency II rules. In practice, in relation to the existing possibility to waive or
limit quarterly reporting requirements, priority would have to be given to “low-risk profile
insurers” when public authorities decide to grant exemptions or limitations of quarterly
reporting.
What are the impacts of the options and how do they compare?
As the impact assessment of Option 2 largely relies on EIOPA’s detailed impact assessment,
for further details, we refer to EIOPA’s Background Document – Analysis (Section 7) and
Background Document - Impact Assessment (Section 7). Only a summary of EIOPA’s impact
assessment (notably Option 2) is provided below.
2.3.1. Option 1 – Do nothing on reporting and disclosure
Under the baseline scenario, no change would be made to the prudential rules as regards
reporting and disclosure. This implies that no alleviation of reporting requirement would be
introduced, to the detriment of insurers. Similarly, the SFCR would remain too technical for
policyholders, and there would be no obligation to ensure that the information provided is
reliable.
2.3.2. Option 2 - Improve quality of reporting and disclosure but extend reporting
deadlines
Under this option, and in line with EIOPA’s proposals, the following actions would be
implemented:
- Extension of the deadline for annual reporting by two weeks and for disclosure by
four weeks;
- New structure of the SFCR, with two separated parts: A high-level brief section for
policyholders, and a more detailed and granular section for other (technical)
stakeholders; this technical part would standardized sensitivity analyses for the largest
insurers;
- New auditing requirement of the balance sheet for all insurance companies and
groups.
Benefits
Under Option 2, the changes proposed by EIOPA would ensure that the “reporting package”
remains fit for purpose and the proportionality principle is better implemented in the
170
There would be no conflict if it were possible in each Member State to exempt exactly 5% of a national
market (not more, not less), but it is quite unlikely that the market shares are such that an exact figure of 5% can
be achieved.
Page | 172
reporting framework. Therefore, supervisors would collect the necessary data and insurers
would benefit from the extension of the annual reporting deadlines. The readability of
prudential information that is publicly disclosed would be materially improved, as
policyholders would benefit from the simpler structure of the SFCR. For other stakeholders,
the introduction of standardised sensitivity analyses for the largest insurers that are relevant
for financial stability purposes would improve the comparability of insurers’ risk exposures
to other market participants (i.e. insurers would have to disclose how their solvency position
is affected by changes in certain market variables, e.g. equity markets, interest rates, etc.).
The accuracy and reliability of prudential information would be improved thanks to the
auditing requirement of the Solvency II balance sheet. Therefore, the overall quality of the
information provided to the public would be improved.
In summary, reporting and disclosure requirements would be amended so that they reduce
undue regulatory burden (extension of reporting deadlines), they are proportionate to the risk
of insurers (additional information is only required for the insurers that are relevant for
financial stability purposes) and they are more transparent towards the public.
The enhanced reliability of prudential information implies that Option 2 would also enhance
the quality of insurance supervision, and would improve the policyholder protection. It
would also enhance the level-playing field by ensuring that audit requirements apply to all
insurers wherever they are located. The general improvement of the reporting data, of the
transparency to the public (which can improve market discipline) and of the insurance
supervision more broadly, could reduce the potential build-up of systemic risks in the
insurance sector, with positive effects on financial stability.
Costs
Option 2 would generate additional implementation/compliance costs due to the new
requirement on auditing of the balance sheet. According to EIOPA’s advice, the expected
cost would be in a range between EUR 5,000 and 600,000, with a median value of EUR
50,500. However, it should be noted that such requirements are already implemented in
several EU Member States, following an EIOPA’s statement171
issued in 2015, because
national legislations established an auditing requirement for the balance sheet or an even
broader scope (key elements like balance sheet, capital requirements, eligible own funds, or
even the whole SFCR). Currently, 13 Member States impose audit requirements that go
broader than the Solvency II balance sheet, while 3 EEA Member States (Germany, Denmark
and Liechtenstein) only require the auditing of the balance sheet. Therefore, implementation
costs would only apply to insurers based in the nine Member States, which currently do not
impose any audit requirement172
. Indeed, according a recent survey from EIOPA173
, 73% of
companies indicated that they were already auditing the balance sheet, and 84% of them, that
the audit requirements were broader than the Solvency II balance sheet.
Option 2 would also generate some minimal implementation costs in relation to the
disclosure of information on sensitivities, following a standardised approach. However, this
requirement would apply only to insurers that are relevant from a financial stability
perspective. EIOPA’s proposed approach follows the best practices observed in the market
and in fact reflects what the largest companies were already disclosing, although with some
differences between them, which was preventing comparison. As such, EIOPA concludes that
this would not generate material compliance costs, while it would contribute to improving
transparency and comparability between the largest insurers.
171
Need for high quality public disclosure: Solvency II's report on solvency and financial condition and the
potential role of external audit, EIOPA BoS 29 June 2015
172
Slovakia, France, Hungary, Latvia, Finland, Czech Republic, Estonia, Lithuania, and Luxembourg.
173
See page 30 of EIOPA's Background Impact Assessment
Page | 173
Overall assessment
Effectiveness, efficiency and coherence: Option 2 would be effective, because it would
address the weaknesses identified on reporting and disclosure by EIOPA, with positive
impact on quality of supervision and – to a lesser extent – financial stability. However, the
very significant impact of the auditing requirement in those Member States which impose no
requirement could outweigh any reduction in the reporting burden for the smaller and less
risky insurers. It would also be coherent with the Solvency II objectives of policyholder
protection and financial stability.
Winners and losers: As data quality would be improved, supervisors and policyholders are
winners under this option. Main losers would be the insurers based in Member States, where
no auditing requirement is implemented. On the contrary, since in many Member States such
a requirement is already in place, Option 2 would address level-playing field issues, setting
harmonized rules in Europe.
Stakeholder views: During EIOPA’s public consultations, insurance stakeholders expressed
reluctance to any new auditing requirement due to high compliance cost and the limited
benefit that it could bring in their view. Additionally, some stakeholders claim that this is
redundant with the general mandate of supervisory authorities to ensure compliance with
prudential rules, including in relation to reporting and disclosure.
2.3.3. Option 3 – Go further than EIOPA in order to reduce regulatory burden for
low-risk profile insurers
Under Option 3, the same changes would be implemented as in Option 2, with the two
following adaptations in order to enhance proportionality of the framework:
- Reduction of the frequency of publication of the full SFCR for low-risk profile
insurers: instead of annual publication, the publication would be triennial, provided
that low-risk profile insurers disclose a simplified SFCR during the years when the
full report is not published. This simplified report would contain the section addressed
to policyholders and a simplified part addressed to the rest of stakeholders, consisting
of the quantitative reporting templates, without additional narrative explanations;
- Exemption from the auditing requirement for low-risk profile insurers, as the
additional compliance costs could outweigh the added value provided by such
requirement.
Benefits
Like in Option 2, the auditing requirement would improve the accuracy and reliability of the
Solvency II balance sheet for the insurers concerned, with improved quality of information
submitted to supervisory authorities and the public. The exemption of the auditing
requirement for low-risk profile insurers would avoid generating additional compliance costs
for the insurers concerned.
Like in Option 2, the dual structure of the SFCR and the inclusion of sensitivity analyses for
the largest insurers would improve the quality of information provided to stakeholders and
foster comparability between insurers, with potential positive effects on market discipline and
financial stability.
Additionally, the reduction of the frequency of the full SFCR would decrease compliance
costs related to disclosure requirements for low-risk profile insurers. Transparency towards
policyholders would still be ensured as the part dedicated to them would be published on a
yearly basis. Similarly, the quantitative reporting templates (which are also submitted to
supervisors) would still be disclosed, which ensures that stakeholders receive a minimum set
Page | 174
of quantitative information from all insurers. Still, the reduced frequency of the publication of
the narrative part targeted to specialised stakeholders would materially reduce the size of the
SFCR and therefore reduce compliance costs for the companies concerned.
Therefore, Option 3 would warrant high quality of supervisory data (like in Option 2) while
making more reporting and disclosure requirements more proportionate. It would avoid that
low-risk profile insurers be required to comply with disproportionate disclosure and auditing
requirements.
Option 3, although having a positive impact on financial stability as Option 2, would not be
as effective as Option 2 in preventing the potential build-up of systemic risks stemming from
low-risk profile insurers. However, this risk does not seem to be material when considering
small sized insures with very limited cross border business.
Cost
The compliance and implementation costs would be similar as in Option 2, but they would
still be lower under Option 3, in view of the waiver of audit requirement for low-risk profile
insurers and the more proportionate disclosure requirements.
One could consider that the waiver of audit requirement be detrimental to the policyholders
concerned, as they would benefit from a lower level of protection than other policyholders
(information may be less reliable). On the other hand, the exemption of audit requirement
would apply to “low-risk profile insurers”, characterised by more simple products and
business activities. Therefore, the risk of inappropriate and unreliable balance sheet is
expected to be low.
Overall assessment
Effectiveness, efficiency and coherence: Option 3 would be the effective in addressing the
weaknesses of the reporting and disclosure framework identified by EIOPA, while avoiding
disproportionate costs for the smallest and least complex insurers. Furthermore, it would
allow reducing compliance costs of supervisory reporting for smaller insurers. However, it
would be less effective than in Option 2 in ensuring the reliability of the prudential data
submitted by insurers (due to the reduced scope of audit requirement). Option 3 would be the
most consistent with the Better Regulation agenda of reducing undue compliance costs for
SMEs.
Winners and losers: In general, like in Option 2, policyholders and supervisors would be
winners. In addition, small and less complex insurers would also benefit from Option 3, due
to the lower frequency of publication of full SFCR and the absence of audit requirement. On
the contrary, the benefit of Option 3 for policyholders of those insurers would be lower than
in Option 2 as they would not benefit from the same level of reliability of information
disclosed as other insurers. Similarly, supervisors of those insurers would not have the
assurance of a reliable Solvency II balance sheet. The “streamlined SFCR” (when the full
SFCR is not published) would provide less information than the full SFCR and as such would
have a negative impact on the granularity of information provided to specialised stakeholders.
Stakeholder views: Option 3 would address some of the concerns from industry on the
disproportionate costs of disclosure requirements and the auditing requirement recommended
by EIOPA. In particular, in the context of the Commission’s public consultation, the reduced
frequency of the SFCR for low-risk insurers was explicitly mentioned by some insurance
associations.
Page | 175
2.3.4. Summary
Option 2 is probably the most effective in improving the quality and reliability of prudential
information reported and disclosed with positive effects on the level-playing field and
financial stability. However, Option 3 appears to be more cost effective by ensuring that the
above mentioned benefits are commensurate to the additional costs that they generate (in
particular for low-risk profile insurers). Therefore, Option 3 is more cost-effective. Taking
into account the impact on insurers and policyholders, Option 3 appears to be overall the
most suitable option, as it would permit to ensure that the reporting and disclosure framework
remains fit for purpose, of high quality and provides accurate information. Therefore, it
ensures a high level of policyholder protection and transparency in Europe while avoiding
disproportionate costs for low-risk profile insurers.
Therefore, the preferred Option is Option 3 (“Go further than EIOPA in order to
reduce regulatory burden for low-risk profile insurers”).
Effectiveness
Efficiency
(Cost-
effectiveness
)
Coherence
LT
green
financin
g
Risk
sensitivity
Volati-
lity
Propor-
tionality
Supervision -
protection
against
failures
Financi
al
stability
Option 1 0 0 0 0 0 0 0 0
Option 2 0 0 0 ++ +++ ++ ++ +
Option 3 0 0 0 +++ ++ + +++ ++
Summary of winners and losers
Insurers Policyholders Supervisory authorities
Option 1 0 0 0
Option 2 -- +++ ++
Option 3 - ++ +
Legend: +++ = Very positive++ = Positive + = Slightly positive +/- = Mixed effect
0 = no effect - = Slightly negative -- = Negative --- = very negative
Page | 176
ANNEX 8: “ZOOMING” ON SOME ISSUES COVERED IN THE IMPACT
ASSESSMENT
The aim of this annex is to provide further technical details on some elements discussed in
the impact assessment. It allows “zooming” on some technical issues discussed in the impact
assessment.
1. STRENGTHENING “PILLAR 2” REQUIREMENTS IN RELATION TO CLIMATE
CHANGE AND SUSTAINABILITY RISKS
In order to address the problem of limited incentives for insurers to contribute to the long-
term financing and the greening of the European economy, Option 4 – “Strengthen “Pillar 2”
requirements in relation to climate change and sustainability risks” has been retained as part
of the overall package of “preferred options” for the impact assessment. The aim of this
section is to further clarify what is embedded within this option.
It has to be noted that several changes to Solvency II rules concerning sustainability risks
have already been made using existing empowerments for delegated acts prior to this
initiative. Following advice from EIOPA, Delegated Regulation (EU) 2021/1256174
clarifies
the obligations of insurance undertakings under Solvency II with respect to sustainability
risks. For that purpose, following provisions were introduced:
 A definition of sustainability risks in the context of prudential rules for insurance
companies;
 A requirement to take into account sustainability risks in risk management;
 An assignment of responsibilities related to sustainability risks to relevant key
functions of insurance companies;
 A requirement for a stewardship approach as part of the rules on investments;
 A clarification of the relevance of sustainability risks in the remuneration policies of
insurers.
However, this initiative was restricted by the scope of the current empowerments for
delegated acts. Notably, there are no empowerments that would allow supplementing the
rules on insurers’ own risk and solvency assessments (ORSAs). Solvency II requires such
regular assessments by insurers in order to (i) quantify their overall solvency needs with a
view to their specific risk profile, (ii) verify continuous compliance with quantitative
requirements and (iii) identify deviations of the company’s risk profile from assumptions
underlying the calculation of capital requirements. The ORSA therefore serves as important
complement to the quantitative rules of “pillar 1”. Outcomes of the assessment must be
provided to supervisory authorities. Following its advice in advance of the adoption of
Delegated Regulation (EU) 2021/1256, EIOPA also issued an opinion on sustainability in
Solvency II in September 2019175
. EIOPA identified the ORSA as a suitable instrument for
insurers to manage environmental and climate risks and for supervisors to monitor those
risks.
While capital requirements are usually quantified by determining the value-at-risk over a one
year time horizon and with a confidence level of 99.5%, environmental and climate risks will
typically materialise over a longer time horizon. Time horizons of significantly more than one
year are common practice for the own risk and solvency assessments by insurers.
174
Commission Delegated Regulation (EU) 2021/1256 of 21 April 2021 amending Delegated Regulation (EU)
2015/35 as regards the integration of sustainability risks in the governance of insurance and reinsurance
undertakings (OJ L 277, 2.8.2021, p. 14)
175
EIOPA, “Opinion on Sustainability within Solvency II”, December 2020 (link)
Page | 177
Furthermore, the probability distributions of climate change-related risks are difficult to
forecast. Scenario analysis is a widely-used tool to assess the vulnerability to risks that are
difficult or not (yet) quantifiable by risk measures that rely on forecasted probability
distributions. To strengthen insurers’ management of environmental and climate risks and to
address potential shortcomings with respect to such risks in quantitative prudential rules, this
initiative will amend the rules on own risk and solvency assessments by a requirement on
insurers to regularly assess the impact of longer-term horizon scenarios of climate change.
Current rules on the ORSA underline that the assessment should be proportionate to the
nature scale and complexity of the risks inherent in the business model of the company. This
principle should also apply to the new element of climate change scenario analysis and in
relation to the company’s exposure to climate change-related risks.
In addition to strengthening the ORSA, the above mentioned opinion by EIOPA identifies
insurers’ use of data as an important area in the management of sustainability risks. Insurers
often use data from past events to inform predictions on risks materialising in the future. Data
from past events may in particular not sufficiently capture the trends caused by climate
change. Where an insurer relies too heavily on such data, the company’s best estimates for
obligations to policyholders or its internal model, where applied, may underestimate
obligations or relevant risks. This initiative will therefore introduce obligations on insurers to
put in place internal procedures to avoid overreliance on data from past events with respect to
climate change-related risks.
In addition to the points described above, further work on capital requirements can be
envisaged. Option 5 – “Strengthen “Pillar 2” requirements and incorporate climate change
and sustainability risks in quantitative rules” has been discarded because of the absence of its
deviation from a risk-based approach and the resulting potentially detrimental impact on
policyholder protection. However, evidence on the riskiness of sustainable investments can
be expected to become available as EU actions on sustainable finance and the European
Green Deal will be implemented. New evidence may allow the calibration of risk-based
changes to capital requirements either for sustainable (“green”) or environmentally harmful
(“brown”) investments.
Climate change is also widely assumed to have an impact on the frequency and severity of
natural catastrophes. Insurers are exposed to natural catastrophes notably through their
obligations to policyholders and beneficiaries, which usually stem from annual contracts.
Insurers are in most cases able to react to changes in their vulnerability to natural catastrophe
risks and adjust contractual conditions or premium levels regularly. However, climate
change-induced trends in the frequency and/or severity of natural catastrophes may warrant
changes to capital requirements for the natural catastrophe risk in the medium or long-term
and possibly regularly thereafter. In addition to affecting the types of natural catastrophes
more common in a given region, climate change may also expose geographical regions to
entirely new types of climate disasters. For instance, global warming may cause droughts and
wildfires to become common phenomena in regions that did not experience such events in the
past. These two types of risks are currently not explicitly covered as catastrophe risks in the
Solvency II standard formula because of their limited relevance for EU insurers at this stage.
However, EU insurers may become more exposed to such or other types of natural disasters
in the future and that may warrant amending the standard formula accordingly.
Against this background, this initiative will set out following mandates to EIOPA:
(i) Review, on an on-going basis, new evidence on sustainable investments and
environmentally harmful investments with a view to potential changes in the
Solvency II standard formula and draw up a report at the latest by 2023;
Page | 178
(ii) Regularly review the evidence on trends in the frequency and severity of natural
disasters and EU insurers’ exposure to such disasters with a view to potential
changes in the Solvency II standard formula catastrophe risk modules;
2. REDUCING UNDUE VOLATILITY IN SOLVENCY II
In order to address the problem of insufficient risk sensitivity and limited ability of the
framework to mitigate volatility of the solvency position of insurance companies, Option 3 –
“Address issues of risk sensitivity and volatility while balancing the cumulative effect of the
changes, has been retained as part of the overall package of “preferred options” for the impact
assessment. The aim of this section is to give a high-level overview of the envisaged changes
to Solvency II to reduce undue volatility which are included in Option 3.
Revising the volatility adjustment.
The volatility adjustment is an adjustment to the regulatory (risk free) interest rates that are
used to value insurers’ liabilities towards policyholders. This adjustment aims at mitigating
the impact on insurers’ capital resources from short-term irrational movements in bond
spreads. It encompasses a general adjustment per currency and a country-specific adjustment
aiming at mitigating the impact of asymmetric short term spread crises in specific Member
States.
As explained in the Evaluation Annex, the review should aim at addressing the deficiencies
of the volatility adjustment, notably:
- The fact that depending on the nature of assets and liabilities, the level of the
volatility adjustment may “over-react” during crisis situations – i.e. insurers in some
countries may have a higher solvency position under crisis situations (e.g. the Covid-
19 crisis during March 2020) than under normal conditions. This “overshooting”
effect has been noted in Belgium and Netherlands for instance;
- The fact that in some countries, the country-specific component may not be
sufficiently responsive to country-specific spread crises due to the existence of cliff-
edge effects in the calculation formula. This “undershooting” effect has been noted
in countries such as Italy, Spain, Portugal and Greece.
EIOPA’s proposals would aim at addressing those two issues by:
- introducing an adjustment factor in the formula which would address the
overshooting issue (the level of the volatility adjustment would be reduced when the
duration of assets is lower than the duration of liabilities); and
- revising the formula of the country-specific component so that it is triggered in a
more smoothly manner and removes cliff-edged effects.
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material cost
Improves policyholder protection by better
mitigating volatility in a technically sound manner.
Insurers
Additional compliance costs as a
new factor for overshooting would
have to be calculated. No impact of
the revised country-component.
Over-shooting and undershooting effect generate
undue volatility in insurers’ solvency, which
provides wrong risk management incentives and
fosters short-termism. Therefore, insurers would
benefit removal of such effects.
Supervisors
Higher complexity in calculation
and more scrutiny needed to
supervise the use of the volatility
adjustment.
The variation of the solvency position of insurers is
more aligned with their risk profile, which facilitates
the supervision by NSAs. Therefore, more efficient
supervision.
Page | 179
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
A less volatile solvency ratio facilitates long-termism in
investment and underwriting decisions.
++
Risk sensitivity and volatility Significant improvement to volatility mitigation. +++
Proportionality Increased complexity in the calculation. -
Quality of supervision -
protection against failures
A more efficient volatility adjustment would ensure that
solvency ratios are not subject to undue volatility which
could result in wrong supervisory actions by NSAs.
However, the calculation formula is more complex.
+/-
Financial stability
By reducing volatility, the revised volatility adjustment
would reduce the risk of procyclical behaviours by insurers.
++
Efficiency (cost-effectiveness)
The negative side effects in terms of additional complexity
are outweighed by the benefits stemming from a more
efficient volatility-mitigation effect, both at micro-level
(more competitive insurance sector, greater ability to make
long-term investments) and macro-level (lower risk of
procyclical behaviour and therefore improved financial
stability).
++
Revising the symmetric adjustment on equity risk
The symmetric adjustment on equity risk is an adjustment, which modulates equity capital
charges depending on the state of stock markets (higher capital charges apply when markets
are overheating, lower requirements when markets are plummeting). Currently, this
adjustment is calculated according to a prescribed formula, but is capped/floored to +/- 10
percentage points (so-called “corridor”). This corridor proved to limit the countercyclical
effect of the symmetric adjustment during the Covid-19 crisis, and in particular, during the
month of March. Indeed, when markets fell, the corridor constrained the decrease in capital
charges on equity to 10 percentage points only. For this reason, EIOPA and the ESRB
propose to extend the corridor to +/- 17 percentage points [the value of 17 percentage points
has been chosen so that no capital charge can go below 22%, which is the lowest value for
standard formula equity capital charges under Solvency II].
The following diagram provided by EIOPA shows the development of the symmetric
adjustment since 1991. The green lines represent the proposed alternative corridor (+/-17%).
The corridor would have resulted in a higher adjustment during the period of increasing
equity prices from 1997 to 2000: The symmetric adjustment would have been equal to its
maximum almost without interruption from May 1997 to August 1988 and from February
2000 to March 2000. It would have resulted in lower symmetric adjustment during the equity
downturns 2001 to 2003 and 2009 to 2010: The symmetric adjustment would have been equal
almost continuously to - 17% from June 2002 to June 2003 and from October 2008 to July
2009. In those situations, the corridor would have limited the symmetric adjustment, while
still improving the countercyclical effect of this tool than under current rules.
Page | 180
At the end of March and April 2020 the symmetric adjustment was at -10% under current
rules, but with the proposed wider corridor, it would have been at -13,07% and - 10,26%
respectively. Compared to a zero adjustment, capital requirements would have decreased on
average by 3.9% if the symmetric adjustment had been -17% and increased by 4.2% if the
symmetric adjustment had been +17% at the end of 2019. The impact is approximately
symmetric.
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact
A wider corridor would enhance the impact of the
symmetric adjustment, hence increasing the
resilience of insurers during times of high equity
prices, and improving policyholder protection.
Insurers
No material impact. The cost of
equity investments would be higher
than under current rules when markets
are overheating.
A wider corridor would enhance the impact of the
symmetric adjustment, hence stabilizing the
solvency position of insurers in times of equity
market turbulences.
Supervisors No material impact No material impact
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
The widened corridor would make the solvency ratio less
volatile depending on stock market fluctuations. Therefore, it
would facilitate long-termism in investment decisions.
However, when equity prices are overheating, the cost of
holding equity would be increased compared to normal times,
fostering countercyclical behaviours.
+/-
Risk sensitivity and volatility
The widening of the corridor would make the solvency ratio
less volatile depending on the evolution of stock markets.
However, it would somehow reduce the risk-sensitivity of
capital requirements on equity investments.
+
Proportionality No impact 0
Quality of supervision -
protection against failures
No impact 0
Financial stability
By enhancing the countercyclical nature of the adjustment, the
widening of the corridor would contribute to financial stability.
++
Efficiency (cost-effectiveness)
The increased corridor of the symmetric adjustment would
improve the countercyclical nature of the framework, with
+
Page | 181
strong positive impact on financial stability. While it would
further reduce capital requirements under crisis situations, it
would also increase requirements when markets are
overheating. Some stakeholders consider that such an effect
would not be consistent with the objectives of the Capital
Markets Union. In practice though, the widened corridor would
ensure that insurers follow a longer term approach when
investing in equity by ensuring that they are able to stick to
their investments and meet the associated capital requirements
regardless of the state of stock markets.
3. BALANCING THE CUMULATIVE IMPACT OF THE REVIEW ON CAPITAL
REQUIREMENTS
In order to address the problem of insufficient risk sensitivity and limited ability of the
framework to mitigate volatility of the solvency position of insurance companies, Option 3 –
“Address issues of risk sensitivity and volatility while balancing the cumulative effect of the
changes, has been retained as part of the overall package of “preferred options” for the impact
assessment. The aim of this section is to clarify more concretely how the balance is achieved.
Achieving the balance partly through phasing-in periods
A first approach to achieve the balance is to rely on the smoothening over time of the changes
on interest rates, which have the most significant negative effect on insurers’ capital
requirements. Based on EIOPA’s impact assessment, and depending on the level of interest
rates:
- Amending capital requirements leads to additional requirements of between EUR 20
billion and EUR 25 billion;
- Amending rules governing the valuation of insurers’ long term liabilities to
policyholders reduces capital resources of between € 34 billion and € 70 billion.
For this reasons, and in line with EIOPA’s advice, changes in relation to interest rates would
be phased in so that their negative impact is progressively implemented over time. More
precisely, EIOPA proposes to spread the impact on capital requirements over five years, so
that the yearly impact of insurers would be between € 4 billion and € 5 billion.
As regards changes to the valuation rules which has a more significant impact, it has to be
noted that Solvency II, when it adopted, included a long transitional period until 2032 so that
insurers are given sufficient time to make their underwriting policies evolve (and notably to
avoid excessive guarantees on life policies). EIOPA proposes to align all transitional periods
on valuation so that the change related to the low interest rates environment would only be
fully implemented in 2032.
Arguments in favour of those
transitional periods
Arguments against those
transitional periods
Conclusion
- Avoids a market-disruptive
impact of changed on
interest rates;
- Acknowledges that the risk
of insurance run (i.e.
consumers rushing to
withdraw their savings from
life policies) is significantly
lower than that of “bank run”
and that the low-yield risk
will only materialise (and
- Reduces the short-term
effectiveness of changes
aiming to improve risk
sensitivity
- Means that in the short
term, the risk is not
appropriately captured
and this can affect
policyholder protection
- There may be side effects
on financial stability risks
The cumulative impact of
changes on interest is
significant. The transitional
period is acceptable as it is quite
short (if the new Directive enters
into application in 2026, this
means only six years of
“transition). In addition, as
average insurers’ capital
resources currently remain
largely above the regulatory
Page | 182
therefore has to be
addressed) over the long-
term
- The limited short-term
impact will avoid any
impediment to EU insurers’
competitiveness
as during the transitional
period, the framework
does not provide all
necessary disincentives to
excessive risk taking
requirements, they still have
sufficient buffers to weather
interest rate risks at this stage.
Therefore, transitional
measures are included in the
preferred Option
Achieving the balance partly through “compensating measures”
A second approach to achieve the balance is to introduce “compensating measures” which
would reduce capital requirements where justified. Below are outlined the technical changes
in addition to EIOPA’s approach to achieve a more balanced outcome of the review.
3.2.1. Reviewing the volatility adjustment
The volatility adjustment is an adjustment to the regulatory (risk-free) interest rates that are
used to value insurers’ liabilities towards policyholders. This adjustment aims at mitigating
the impact of short-term irrational movements in credit spreads on insurers’ capital resources.
It encompasses a general adjustment per currency and, in the case of Euro Area countries, a
country-specific adjustment aiming at mitigating the impact of spread crises that occur in
certain Member States only (and not in the whole Euro Area)176
. However, the effectiveness
of this adjustment in mitigating volatility depends on the very characteristics on each national
market:
- In some Member States (e.g. the Netherlands, Belgium), the adjustment is considered
“too high” (i.e. in crises situations, the volatility adjustment makes a company better
off than under normal conditions) – so called “overshooting” of the volatility
adjustment;
- In other Member States (e.g. Italy, Spain, Portugal, Greece), the volatility adjustment
is deemed “too low” (i.e. despite the existence of a country-specific component, the
volatility adjustment is unable to appropriately mitigate the higher volatility in spread
levels of southern countries) – so-called “undershooting” of the volatility adjustment;
- Finally, in a few countries (in particular, in France), the adjustment is deemed
working well.
EIOPA put forward proposals aiming at increasing the default level of the volatility
adjustment, at improving the functioning of the country-specific component and at addressing
both the “over- and undershooting” issues. Those proposals are largely supported by all types
of stakeholders as improving the functioning of the volatility adjustment.
However, EIOPA also proposes to adjust downward the volatility adjustment to reflect the
so-called “illiquidity” of liabilities (insurers’ liabilities are deemed illiquid if net cash-
outflows are predictable and stable). Insurers with fully illiquid liabilities would not be
imposed a downward adjustment, whereas other insurers would be “penalised” via a less
powerful adjustment.
However, in addition to reducing the ability of the adjustment to address volatility, such an
“illiquidity” adjustment would raise several concerns and has side effects:
- In light of EIOPA’s technical specifications, the new illiquidity component of the
volatility adjustment would reward in the current low-yield environment insurers
176
The volatility adjustment per currency is calibrated on a “representative portfolio” of assets, which would
cover the portfolio of insurance liabilities denominated in that currency. The volatility adjustment per country is
calibrated on the basis of a “representative portfolio” of assets, which would cover insurance liabilities sold in
the insurance market of that country and denominated in the currency of that country.
Page | 183
which offer unsustainably high guaranteed rates on life policies, possibly raising
financial stability risks ; therefore, this adjustment is not efficient
- The recently adopted Regulation (EU) 2019/1238 on a pan-European Personal
Pension Product (PEPP) is aimed at fostering the supply of private pensions in Europe
across border. However, one of the characteristics of the PEPP is its portability (i.e.
the ability to change provider). This portability feature would imply that insurers
providing PEPP products would be classified as having “liquid” liabilities. Therefore,
insurers would be at a disadvantage vis-a-vis insurers selling national products with
no portability. This would not be coherent with the objective of developing the PEPP
(also reiterated in the Capital Markets Union Action Plan)
- Currently, the volatility adjustment is a simple tool the value of which is centrally
derived by EIOPA. Under the new approach, each insurer would have to calculate its
own volatility adjustment. This creates undue burden for smaller and less complex
insurers, which may decide to rely on the volatility adjustment anymore, even if it is
at the cost of higher volatility of the solvency ratio. Therefore, the illiquidity
adjustment would not be coherent with the Better Regulation agenda.
- EIOPA proposes that insurers’ liquidity risk is measured by calculating the standard
formula level of capital requirements for increased mortality or exercise of
redemption rights. Therefore, EIOPA is double counting the same risk in the capital
requirement and through the level of the volatility adjustment when valuing its
liabilities.
For those reasons, Option 3 removed the illiquidity adjustment. Based on EIOPA’s impact
assessment and Commission services’ proxy calculations (with very simplifying assumption,
notably that insurance liabilities behave linearly with interest rates), it is estimated that the
impact of this adaptation would lie between € 5 billion and € 11 billion in terms of additional
capital resources.
3.2.2. Reviewing the risk margin
The risk margin is one of the components of insurers’ liabilities towards policyholders
representing the potential costs of transferring insurance obligations to a third party should an
insurer fail. It is calculated as the product of a cost-of capital rate (currently set at 6%) and
the present value of expected future capital requirements stemming from holding insurance
contracts. The risk margin has been subject to heavy criticisms over the recent years by both
insurance stakeholders and the European Parliament. Indeed, its level and volatility are
deemed too high, especially for insurance products covering longevity risks e.g. annuities.
According to those stakeholders, this fact is allegedly restricting insurers’ ability to continue
offering long-term products with guarantees and to make long-term investments. EIOPA
proposes an adaptation to the formula, which would reduce both the level (by around 15%)
and the volatility of the risk-margin177
. However, EIOPA did not reassess the appropriateness
of the cost-of-capital rate despite the request from the Commission services to analyse the
arguments put forward by the industry on this topic178
.
Several stakeholders are claiming that the 6% cost-of-capital rate should also be reviewed.
This value was set before the Directive entered into application in 2016, and has never been
177
Broadly speaking, EIOPA’s proposal consists in introducing a new parameter (“lambda factor”) which
reduces the contribution of projected capital requirements that would stem from holding insurance contracts in
the long run (i.e. long-term projected SCRs would have a lower weight than under current rules). However,
according to EIOPA’s proposal, the mitigating effect of this factor would be capped, so that future SCRs cannot
be reduced by more than 50% in comparison with the current formula. As EIOPA does not provide concrete
justifications of this cap, the Commission services do not intend to include this floor. The impact is moderate –
between EUR 600 million and EUR 900 million depending on market conditions.
178
See section 3.4 of the Commission’s Call for Advice to EIOPA on the review of Solvency II.
Page | 184
revised. However, in order to be consistent, it should be acknowledged that the cost-of-capital
rate also needs to reflect the low-yield environment. For this reason, it seems acceptable to
proceed to a 1 percentage point decrease in the cost of capital rate (down to 5%). This
decrease would also be consistent with the downward trend of lower guaranteed rate on
insurance policies, which make up the major share of an insurer’s balance sheet. The
insurance industry is requesting a 3 percentage points decrease in the cost of capital but this
would not be substantiated by evidence and would lead to an excessive cut in the risk margin.
On the contrary, a 1 percentage point decrease in the cost of capital rate would allow cutting
the risk margin by only 17% (€26 billion of additional capital resources). For this reason,
Option 3 includes a 1 percentage point decrease in the cost of capital rate in addition to
EIOPA’s proposals.
3.2.3. Assessment of the balance of the “package”
Based on EIOPA’s impact assessment, the Commission services have assessed the average
impact of Option 3 of the core part of the impact assessment on the excess capital of
insurance companies and on solvency ratios, at two different reference dates (end of 2019 –
before the Covid-19 crisis – and mid-2020 – during the Covid-19 crisis)179
.
Reference date end of 2019 Reference date mid-2020
Change in
solvency ratio
compared to
under current
rules
Change in excess
own funds
compared to current
rules
Change in
solvency ratio
compared to
under current
rules
Change in excess
own funds over
compared to current
rules
Option 2
(EIOPA)
-13 percentage
points
(from 247% to
233%)
- EUR 15 billion
(sample)
- EUR 18 billion
(whole market)
-22 percentage
points
(from 226% to
204%)
- EUR 40 billion
(sample)
- EUR 55 billion
(whole market)
Option 3
(preferred)
-2 percentage
points
(from 247% to
245%)
+ EUR 16 billion
(sample)
+30 billion (whole
market)
-3 percentage
points
(from 226% to
223%)
+ EUR 8 billion
(sample)
+16 billion (whole
market)
Reference date end of 2019 Reference date mid-2020
Change in
solvency ratio
compared to
under current
rules
Change in excess
own funds
compared to current
rules
Change in
solvency ratio
compared to
under current
rules
Change in excess
own funds over
compared to current
rules
Option 2
(EIOPA)
-13 percentage
points
(from 247% to
233%)
- EUR 15 billion
(sample)
- EUR 18 billion
(whole market)
-22 percentage
points
(from 226% to
204%)
- EUR 40 billion
(sample)
- EUR 55 billion
(whole market)
Option 3
(preferred)
-2 percentage
points
+ EUR 16 billion
(sample)
-3 percentage
points
+ EUR 8 billion
(sample)
179
Note that the Commission services are considering an additional change compared to EIOPA’s advice,
regarding the way of implementing the incorporation of negative interest rates in the calculation of capital
requirements for interest rate risk. In particular, the Commission services note that there is a discrepancy
between the approach used to derive the regular risk-free rate curve and the method used to derive the “stressed”
risk-free rate curve. More precisely, for the purpose of interest rate risk, there is no acknowledgement that long-
maturity rates do not stem from market data but are derived by using some mathematical extrapolation
approach. An alignment between the two approaches could be envisaged (i.e. ensuring that “stressed” rates are
derived in a similar manner as regular rates). At the time of submission of this impact assessment, the final
decision has not been made yet. However, for the purpose of allowing stakeholders to know the potential
maximum impact of the review, this change is supposed to be implemented in the table of quantitative impact.
Page | 185
(from 247% to
245%)
+EUR 30 billion
(whole market)
(from 226% to
223%)
+EUR 16 billion
(whole market)
Therefore, Option 3 is the only option which achieves the objective of balanced outcome
(neutrality in surplus, slight decrease in solvency ratios) while improving the risk sensitivity
of the framework.
4. ENHANCING GROUP SUPERVISION
As part of the problem of deficiencies in the supervision of insurance companies and groups,
Option 2 – “Improve the quality of supervision by strengthening or clarifying rules on certain
aspects, in particular in relation to cross-border supervision” has been retained as part of the
overall package of “preferred options” for the impact assessment. This option encompasses
clearer rules on group supervision. The objective of this section is to clarify in broad terms
what is potentially envisaged as part of the enhanced group supervision.
Option 2 embeds improvements on group supervision with the aims of (i) strengthening and
harmonising supervisory powers towards groups including when their headquarter is in a
third country or when the parent company is a non-regulated entity180
, and (ii) clarifying
prudential rules on capital requirements and risk management which are subject to diverging
interpretations by Member States181
.
This section will discuss the merits of the main proposals on group supervision. It leverages
on the very granular impact assessment by EIOPA and does not aim to conduct another
impact assessment (but to simply justify the technical choices made). When discussing
effectiveness, we will assess the merits of each option against the different specific objectives
of the core part of the impact assessment. In addition, as insurance groups can have an
international footprint that goes beyond European borders, we assess the different options
against the general objective of international competitiveness.
Strengthening and harmonising supervisory powers towards groups
4.1.1. Exercising group supervision in case of complex or unclear corporate
structure
Issue: In most cases, groups are characterised by a transparent structure with a clearly defined
parent company. However, in other cases, group structures or corporate organisations may
hinder the exercise of group supervision. For instance, several companies which do not have
capital ties between one another and therefore do not form a group per se may still act in full
coordination (as if they were a group) – e.g. because the persons running the companies have
close ties. In such cases of “horizontal groups” (i.e. groups with no clearly defined parent
company), the supervisor has no possibility to impose group supervision. In other cases, there
may be difficulties in imposing group supervision, e.g. when a non-insurance group, possibly
headquartered outside Europe, has subsidiaries in Europe. This can concern cases of
leveraged buy-out where an unregulated entity acquires insurance companies through debt
financing while circumventing group supervision.
180
Proposal includes better framing of cases where an authority may completely waive group supervision (under the control
of EIOPA), clarifying powers over unregulated parent companies of a group, power to restructure the group where the
corporate structure is such that it prevents effective supervision, strengthened supervision of groups whose parent company
is outside Europe to avoid incentivising groups to circumvent Solvency II requirements by establishing their head office
outside Europe.
181 This includes clarifications on how to account for equivalent third-country insurers in the group solvency calculation
(currently, a legal gap allows to not take account of currency risk), to account for small subsidiaries (proportionality), to
integrate non-insurance financial institutions and on rules governing capital transferability within a group.
Page | 186
Recommendation by EIOPA: Supervisors should have the power to:
- exercise group supervision even if there is no corporate group, where it is clear that
decisions and strategies of different companies are coordinated with one another;
- require the restructuring of a group where group supervision cannot be otherwise
exercised.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material cost
Improved policyholder protection through enhanced
group supervision.
Insurers
Regulatory burden for
entities/groups for which group
supervision is extended or
restructuring is required.
Improved level-playing field and legal certainty.
Impact is expected to be null on existing groups, but
will affect those insurers trying to circumvent
regulatory requirements.
Supervisors
Higher supervisory costs in case of
extension of group supervision.
More legal certainty in supervisory activities, and
more effective and efficient group supervision.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve quality of supervision and
reduce the risk of regulatory arbitrage; all this contributes to
enhancing policyholder protection.
++
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
Very limited side effects (costs for the groups concerned)
which are outweighed by the improved level-playing field
and quality of group supervision.
++
Conclusion: This policy recommendation is cost effective, by granting powers to supervisors
while clarifying that this is a last resort measure aiming to avoid regulatory arbitrage.
Therefore, Option 2 of the impact assessment endorses EIOPA’s advice on this topic.
4.1.2. Exercising group supervision over unregulated parent holding companies
Issue: In some cases, insurance groups are headed by a non-regulated holding company.
Depending on national implementation of Solvency II, those groups may or may not be
subject to group supervision: Supervisors have discretion in assessing whether the main
activity of the holding company is to hold and manage insurance subsidiaries (in which case
group supervision applies) or not (in which case public authorities only supervise intragroup
transactions). In addition, even if group supervision should apply, several supervisory
authorities reported that they have no or insufficient supervisory powers towards top
unregulated entities of insurance groups. This leads to an inconsistent application of group
supervision within the Union, which is not justified – in particular when taking into account
the particular responsibilities the concept of group supervision places on the parent company
and its governance framework.
Page | 187
Recommendation by EIOPA:
- Clarify, in line with banking rules182
which parent holding companies trigger full
group supervision at their level;
- Ensure that supervisors have the necessary enforcement powers over parent holding
companies or to require the parent company to ensure a corporate structure that
enables group supervision.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact.
Enhanced policyholder protection
through more effective group
supervision.
Insurers
Additional capital requirements and
compliance costs for those groups which
according to national implementation are
subject to full group supervision or to which
group supervisors apply their new enforcement
powers.
More clarity and legal certainty, and
greater level-playing field.
Supervisors
Potential increase in supervisory tasks
depending on whether new groups are subject
to group supervision.
More clarity and legal certainty, and
more effective supervision through more
powers over parent companies.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility
By ensuring that unregulated holding companies are captured
in group supervision, the risk sensitivity of capital
requirements (i.e. the ability of the group SCR to capture all
risks) is improved.
+
Proportionality No impact identified. 0
Quality of supervision –
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
Very limited side effects (costs for the groups concerned)
which are outweighed by the improved level-playing field
and quality of group supervision.
++
Conclusion: This policy recommendation is cost effective, by granting powers to supervisors
aiming to ensure that group supervision can be exercised over parent holding companies. The
definition of holding companies itself converges with the approach followed in the banking
sector.
4.1.3. Exclusion from group supervision
Issue: The Solvency II directive provides the option to NSAs to exclude a company from the
scope of group supervision. However, Member States shall also provide for supervision of
insurance groups. The exclusion of a company from the scope of the group supervision
182
See Regulation (EU) 2019/876.
Page | 188
leading to a waiver of the group supervision is not in the spirit of the Solvency II directive,
especially on the basis of justification that this company is of negligible interest with respect
to the objectives of group supervision.
In practice, different supervisory approaches regarding the exclusion of a company from the
scope of the group supervision are observed (some NSAs do waive group supervision
whereas others would never follow such an approach) which leads to inconsistencies between
Member States and an uneven level-playing field.
Recommendation by EIOPA:
- Introduce an overall principle on the exclusion of companies from group supervision
to ensure exceptional cases are adequately justified, documented and monitored. A
waiver of group supervision should only be possible in exceptional circumstances
after consultation of the group supervisor with all relevant supervisors as well as
EIOPA;
- Introduce several criteria to be taken into account when evaluating if the exclusion of
a company might be acceptable, as it is of “negligible interest” with respect to the
objective of group supervision.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact.
Enhanced policyholder protection through
more effective group supervision.
Insurers
Additional compliance costs for those groups
excluding companies which are not deemed
of negligible interest or which had group
supervision waived, will face compliance
costs fulfilling requirements under group
supervision.
More clarity and legal certainty, and
greater level-playing field.
Supervisors
Increase in supervisory tasks for those groups
whose scope of supervision is widened.
More clarity and legal certainty; more
effective and consistent supervision across
the Union.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and
volatility
No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved
level-playing field; all this contributes to enhancing
policyholder protection.
++
Financial stability No impact identified. 0
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
Very limited side effects (costs for the groups
concerned) which are outweighed by the improved level-
playing field and quality of group supervision.
++
Conclusion: This policy recommendation is cost effective, by applying the Solvency II
framework in a more consistent manner by a coherent inclusion of companies belonging to a
group as well as closing gaps to circumvent group supervision.
Page | 189
4.1.4. Supervision of third country insurance groups
Issue: A large number of insurance groups is active in the EEA although their ultimate parent
company is located in a third country (i.e. outside the EEA). EEA supervisors do rely under
certain conditions on the group supervision exercised by a third country, if the local rules are
deemed equivalent in this area. For all other groups the competent EEA group supervisor
may apply relevant Solvency II requirements via an EEA company to the worldwide group as
if it was based in the EEA. Such an approach if for obvious reasons not practicable in most
cases. Alternatively, Solvency II offers the possibility to apply “other methods” to ensure
appropriate group supervision. As the concept of “other methods” is not further specified and
leaves much room for interpretation, in practice the intensity of supervision of such groups
varies widely. This faces potentially significant harm to European policyholders if there are
significant risks, which are not appropriately identified or mitigated, e.g. risks stemming from
intra group financing. It can also incentivise EU-based groups to move their parent company
outside the EEA if they can hope to circumvent Solvency II group requirements.
Recommendation by EIOPA:
- The concept of “other methods” should be kept whilst clarifying its objectives and
meaning with the view of giving a clearer mandate to NSAs on what they should do
when supervising Third-Country groups;
- EIOPA should be also be consulted in the consultation process on “other methods”.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact.
Enhanced policyholder protection through
more effective group supervision.
Insurers
Additional compliance costs for those
groups on which currently a light concept
of other methods is imposed.
More clarity and legal certainty, and greater
level-playing field.
Supervisors
Potential increase in supervisory tasks for
those groups on which the concept of other
methods will be strengthened.
More clarity and legal certainty; more
effective and consistent supervision across the
Union.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green financing No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved
level-playing field; all this contributes to enhancing
policyholder protection.
++
Financial stability No impact identified. 0
International competitiveness
Significant improvement of EU insurers’
competitiveness as supervisors would be required to
exercise stronger scrutiny over Third-Country groups
with the aim of ensuring that there is no circumvention
of Solvency II group rules by establishing a parent
company outside the EEA.
+++
Efficiency (cost-effectiveness)
Very limited side effects (costs for the groups
concerned) which are outweighed by the improved
level-playing field and quality of group supervision, as
well as the material improvement of the competitiveness
of EU groups.
++
Page | 190
Conclusion: This policy recommendation is cost effective, by applying the Solvency II
framework in a more consistent manner in the supervision of non-EEA insurance groups.
Clarifying prudential rules on capital requirements
4.2.1. Simplified calculations for small insurers
Issue: As a basic principle, all insurance companies belonging to an insurance group have to
be included in the group Solvency Capital Requirement calculation based on Solvency II
calculations. This can sometimes prove to be very complex, for instance for small
subsidiaries in developing markets, and the framework currently offers limited simplified
approach when this general approach is operationally burdensome (the Directive allows
removing the book value of that entity from the group’s capital resources, which can be very
penalising for the groups). In practice though, some insurance groups have developed other
simplified approaches, which vary greatly within the Union leading to unequal conditions for
insurance groups among the Union.
Recommendation by EIOPA:
- Introduce a new simplified approach which is sufficiently conservative to
appropriately capture relevant risks, but which is less penalising than the full
deduction of the book value of the entity;
- This simplified approach should only be applied to the extent that the entities
concerned are small in relation to the group balance sheet (introduction of maximum
materiality thresholds);
- Prior approval by the group supervisor is required.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact. No material impact.
Insurers
Additional compliance costs for those
groups, which currently exclude entities
in a more liberal way than under the new
concept; vice versa reduced compliance
costs for those groups not using the
concept currently.
More clarity and legal certainty, and greater
level-playing field; calculation is less
burdensome for small companies.
Supervisors
Potential increase in supervisory tasks by
the approval of the simplified approach.
More clarity and legal certainty; more effective
and consistent supervision across the Union in
particular as maximum thresholds for simplified
calculations.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and
volatility
No impact identified. 0
Proportionality
EIOPA’s proposal would allow groups in a consistent and
effective way to include small immaterial companies from
third countries into the calculation of capital requirements.
++
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved
level-playing field; all this contributes to enhancing
policyholder protection.
++
Financial stability No impact identified. 0
Page | 191
International
competitiveness
Slightly positive impact by limiting the regulatory
compliance cost of expansion at international level.
+
Efficiency (cost-effectiveness)
Very limited side effects (costs for the groups concerned)
which are outweighed by the improved level-playing field
and effectiveness of group supervision.
++
Conclusion: This policy recommendation is cost effective, by applying the Solvency II
framework in a more consistent manner in the supervision of non-EEA insurance groups. It
acknowledges that European groups are investing and expanding outside the EEA, and that
groups need rules that also facilitate an international level-playing field by not putting
policyholder protection at risk.
4.2.2. “Combination of methods”
Issue: The group Solvency Capital Requirement under the Solvency II framework can be
calculated through two different methods. It offers also the possibility to combine the two
methods, which is attractive for EEA-groups with insurance companies located in equivalent
third country jurisdictions (because in that case, local prudential rules can be used to
aggregate risks to the insurance groups instead of Solvency II rules). The interpretation of
current rules implies that some risks are possibly overlooked183
.
Recommendation by EIOPA: Groups using the above-mentioned approach should also take
into account those risks (notably currency risk) which are currently not considered in the
calculations.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact.
Enhanced policyholder protection through
increased risk sensitivity of the framework.
Insurers
Significant additional cost of capital
for groups, which are very active in
equivalent jurisdictions using the
combination of methods.
More clarity and legal certainty, and greater level-
playing field by increasing risk sensitivity of the
framework.
Supervisors
Potential slight increase in
supervisory tasks through supervision
of changed methodology.
Increase in the efficiency and effectiveness of
supervision through increased risk sensitivity of
the framework.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility
The inclusion of risks which are currently potentially
overlooked will increase the risk sensitivity of the framework.
++
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability No impact identified. 0
183
This is in particular the case for currency risk. For example, if an EEA-group with Euro-denominated assets
and liabilities includes its US based subsidiary by taking into account the local US capital requirements, which
are based on US Dollars and are converted into EUR. The currency risk stemming from the potential mismatch
between this US subsidiary’s currency and the group’s currency due to volatility in exchange rates is not taken
into account. Another risk is market concentration risk.
Page | 192
International competitiveness
Additional cost of capital potentially leading to a deterioration
of the international competitiveness of such groups. At the
same time, the increased risk sensitivity will increase the
resilience of insurance groups potentially leading to a stronger
position in the markets.
--
Efficiency (cost-effectiveness)
The increased costs for the groups concerned are outweighed
by the increased risk sensitivity of the framework, the
improved level-playing field and the effectiveness of group
supervision.
+
Conclusion: The increase in costs for affected international active insurance groups might
have a negative impact on their international competiveness. These costs will be outweighed
by the increase in the risk sensitivity of the Solvency II framework and subsequently in
policyholder protection. There are different ways of taking into account currency and
concentration risks stemming from third-country insurers in capital requirements. The
Commission services will chose the technical approach which makes economic sense while
note having undue disruptive effect on any group. According to EIOPA’s impact assessment,
the decrease in solvency ratios stemming from this option is on average below 1%.
4.2.3. Own funds supervision
Issue: Insurance companies must hold assets to cover their liabilities. In addition, the
Solvency II framework requires to hold own funds (capital resources) to weather adverse
situations or developments which is reflected in the specific capital requirements. The same
concept applies for insurance groups. With regards to own funds there are unclear rules
governing how to ensure that specific capital items recognised within individual insurance
companies are indeed available and transferable within the group to potentially absorb losses
of other insurance companies for the sake of policyholder protection184
.
Recommendation by EIOPA: Clarify the rules governing the eligibility and availability of
own funds within an insurance group.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact. Enhanced policyholder protection.
Insurers
Potential increase in financing cost for some
groups; increased costs in demonstrations that
specific capital items are available and
transferable within the group; potentially
increased costs if capital position is rejected by
the supervisory authority.
More clarity and legal certainty, and
greater level-playing field following a
harmonisation of the regulatory
framework.
Supervisors
Potential increase in costs resulting from
additional supervisory reviews on specific own
fund items.
Increase in the efficiency and
effectiveness of supervision through
increased risk sensitivity of the
framework.
Impact of EIOPA’s proposals (compared to “no change”)
Effect
ivene
ss
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
184
For example, the framework needs to be clear on the conditions under which subordinated debt issued by a
non-regulated firm within an insurance group can be accounted for to cover potential capital needs resulting
from a winding up of insurance companies within the group.
Page | 193
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
The limited side effects (costs for the groups and
supervisory authorities) are outweighed by the improved
level-playing field and effectiveness of group supervision.
++
Conclusion: This policy recommendation is cost effective, by applying the Solvency II
framework in a more consistent manner by a coherent consideration of available own funds
within an insurance group leading to a greater level-playing field and an increase in
policyholder protection.
4.2.4. Minimum consolidated group Solvency Capital Requirement
Issue: Individual insurance companies have to be hold adequate levels of capital to be able to
fulfil their obligations under the insurance policies. In addition the Solvency II framework
requires to hold additional capital to weather adverse events or developments185
, the Solvency
Capital Requirement (SCR). A breach of the SCR results in supervisory measures imposed on
the insurance company. If another threshold, the Minimum Capital Requirement (MCR),
which is between 25% and 45% of the SCR, is breached, supervisors will take ultimate
supervisory action, e.g. stop the company to do new business.
There is also a group SCR for insurance groups. The framework does not foresee the concept
of a group MCR but of another “minimum threshold”. When this other threshold is breached,
insurers are required to default on some of their debt instruments. Due to a different scope of
companies being considered in the calculation, under particular circumstances this “minimum
threshold” could be breached and lead to unintended consequences (of being required to
default) although the group SCR as the basic target capital requirement is not breached.
Recommendation by EIOPA:
- The calculation of the group SCR and the other threshold should be aligned with
respect to the companies taken into account in the calculation;
- The existing “minimum threshold” will only be used as a floor to calculate the group
SCR; i.e. regardless of the way capital requirements and diversification benefits are
calculated, the group SCR can never fall below that floor;
- Introduction of a new metric similar to a group MCR as a percentage of the minimum
target capital requirement, which would be used to determine whether an insurance
group should default on its debt instruments. This new metric would be set in such a
way that the default cannot occur before the group SCR is breached.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
Enhanced policyholder protection through
consistent application of the framework preventing
unjustified supervisory action on sound insurance
groups.
Insurers Increase in costs as more entities Avoidance of insurance groups breaching
185
For example caused by increased claims costs or adverse development in capital markets reducing the value
of the insurance company’s assets.
Page | 194
would be included in the calculations
with a potential impact on marginal
costs to calculate, report and comply
with the new metrics.
regulatory requirements, which are technically not
justified and unintended by the framework.
Supervisors
Costs derived from the application of
the new metrics in supervision.
Increase in the efficiency and effectiveness of
supervision through avoidance of insurance groups
breaching regulatory requirements, which are
technically not justified and unintended by the
framework.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability
An insurance group breaching its capital requirements and
supervisors being forced to take supervisory action might
cause distress in financial markets and build up systemic
risk.
+
International competitiveness
Easier access to capital financing as market participants
would no longer fear the possible breach of regulatory
requirement, which would trigger default by the insurer
despite not based on a technically sound approach.
+
Efficiency (cost-effectiveness)
Very limited side effects (costs) which are outweighed by
the improved consistency and effectiveness of group
supervision.
++
Conclusion: This policy recommendation is cost effective, while increasing the consistent and
coherent application of capital requirements also for insurance group. This leads also to an
increase in policyholder protection and increased financial stability.
4.2.5. Treatment of companies from other financial sectors (banks, pension funds,
etc.)
Issue: In some Member States in particular large insurance groups are often connected to
banks. These structures raise issues as the application of banking rules within the Solvency II
framework is not always clear. Regarding capital requirements, banking rules have different
metrics (Common equity tier 1 ratio, tier 1 ratio, etc.) and buffers (for instance, systemic
buffers), and the Solvency II framework does not specify which capital requirements should
be taken into account when assessing the solvency position of a group. Similarly, regarding
own funds, in view of the lack of legal clarity, it is possible for an insurance group to disclose
a high solvency position even if the insurance part has limited capital resources, because the
group is holding a well-capitalised bank/pension fund with sectoral-specific own funds which
cannot be transferred to absorb insurance losses when needed. In such a case, the “rich”
entity from another financial sector is leading to an overstatement of the insurance group’s
solvency, if the bank’s wealth is not available to absorb losses in the insurance part.
Recommendation by EIOPA:
- Clarify the appropriate banking capital requirements which should be considered
when calculating an insurance group’s solvency position
Page | 195
- Clarify how to treat a bank’s excess capital (i.e. capital resources above capital
requirements)
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact.
Enhanced policyholder protection through
increased risk sensitivity of the framework.
Insurers
Potentially increased costs resulting in less
flexible approaches under the proposed
option.
More clarity and legal certainty as well as
convergence of practice leading to a greater
level-playing field.
Supervisors
Potential slight increase in supervisory tasks
through supervision of changed
methodology which allows less flexibility
and requires individual assessments.
Increase in the efficiency and effectiveness
of supervision through increased consistency
and convergence in supervisory practice.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green financing No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
Very limited side effects (costs) which are outweighed by the
improved consistency and effectiveness of group supervision.
++
Conclusion: The option is cost effective, while clarifying the application of the requirements
in particular from the banking regulation in the Solvency II framework leading to a
harmonised and consistent application across the Union and to increased policyholder
protection.
4.2.6. System of governance of insurance groups
Issue: One key component of the Solvency II framework is the requirement for insurance
companies to have in place an effective “system of governance” which provides for sound
and prudent management of the business. In this respect, the executive and supervisory board
of the insurance company has a prominent role as it holds ultimate responsibility for the
company’s compliance with the Solvency II framework. Insurance groups are also required to
have in place an effective system of governance. However, due to regulatory gaps, the
framework offers great flexibility to industry leading to an uneven level-playing field. Due to
a gap in the legislation, the role of the executive and supervisory board of the insurance
group’s parent company is unclear.
Recommendation by EIOPA:
- Clarify the requirements on the system of governance for insurance groups;
- Clarify the role of the executive and supervisory board of the insurance group’s parent
company with regard to the group’s system of governance.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No material impact. Enhanced policyholder protection
Page | 196
through clarified governance
requirements for insurance groups.
Insurers
Potential costs resulting from changes on the
group’s system of governance depending on the
current transposition of the Solvency II framework
in individual Member States.
Harmonisation of the framework
would increase the level-playing field.
Supervisors
Potentials costs resulting amended supervisory
practice depending on the current national
transposition of the Solvency II framework in
individual Member States.
Increase in the efficiency and
effectiveness of supervision through
increased risk sensitivity of the
framework.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green financing No impact identified. 0
Risk sensitivity and volatility
The strengthening of the groups’ system of
governance will increase their risk sensitivity.
+
Proportionality
The proposal includes a proportionate approach to
complexity and risks.
+
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved
level-playing field; all this contributes to enhancing
policyholder protection.
++
Financial stability
The increase in insurance groups’ resilience should
reinforce slightly financial stability.
+
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
Very limited side effects (costs) which are outweighed by
the improved consistency and effectiveness of group
supervision.
++
Conclusion: This policy recommendation is cost effective, by clarifying the framework to
enhance insurance groups’ resilience and enhancing effective group supervision leading to a
greater level-playing field and increased policyholder protection.
5. ENHANCING SUPERVISION OF CROSS-BORDER INSURANCE COMPANIES
In order to address the problem of deficiencies in the supervision of (cross-border) insurance
companies, Option 2 – “Improve the quality of supervision by strengthening or clarifying
rules on certain aspects, in particular in relation to cross-border supervision” has been
retained as part of the overall package of “preferred options” for the impact assessment.
Under this Option, the legal framework would be clarified and strengthened to ensure more
quality and convergence of supervision, in particular in relation to cross-border and group
supervision. The aim of this section is to clarify in broad terms what is embedded as part of
the enhanced supervision on cross border insurance activities.
Option 2 contains improvements on supervision of cross border insurance activities with the
aims of (i) ensuring more efficient information gathering/exchange during the authorisation
process and ongoing supervision, (ii) improving cooperation between Home and Host
supervisory authorities, under the coordination/mediation of EIOPA.
This section will discuss the merits of the main proposals on cross border supervision. It
leverages on the granular impact assessment by EIOPA and does not aim to conduct another
impact assessment (but to simply justify the choices made). It also contains some
complementary proposals aiming to “upgrade” in the legal framework provisions which are
Page | 197
included in the Decision on Collaboration of the insurance supervisory authorities (non-
binding agreement between supervisors within EIOPA).
Ensuring more efficient information gathering/exchange during the
authorisation process and ongoing supervision
5.1.1. Efficient information gathering during the authorisation process
Issue: During the authorisation (licensing) process, the supervisory authority which receives
the application does not necessarily know whether an application has already been submitted
in other Member States, and if so, what the outcomes of such applications have been. Under
the EIOPA Decision on Collaboration, it is expected that NSAs require that applicants
indicate whether they have already applied in other Member States. However, the Decision
on Collaboration is not binding for insurers and EIOPA refers to cases where such
information was not submitted. Therefore, NSAs lack the necessary legal obligation for the
industry across the EEA to submit information on previous applications.
Recommendation by EIOPA: Include in the Solvency II Directive the requirement, currently
foreseen by the Decision on Collaboration, on the applicant to inform the NSA on
rejections/withdrawals of former requests for licensing. By introducing this requirement, the
NSA that receives the application would be in a better position to assess the condition for
authorisation and collaborate with the NSA that rejected the authorisation in the past. Having
the requirement in Level 1 opens the possibility for sanctions in cases where the insurer
provides no or insufficient information.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
Improved policyholder protection through a
formal obligation. Addresses the risk of forum
shopping by those applicants, which have been
rejected elsewhere.
Insurers
The decision on former rejection(s)
is already in the applicants’
possession. Therefore, costs of
providing this information would be
limited.
Improved level-playing field and clear legal
obligations.
Supervisors
This would be an “upgrade” of the
text of the Decision on cooperation,
no extra costs would be involved.
NSAs have a clear legal power to ask for the
relevant information on earlier rejections of
authorisations.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure and improved level-
playing field; all this contributes to enhancing policyholder
protection.
++
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Page | 198
Efficiency (cost-effectiveness)
Very limited side effects (costs) which are outweighed by
the improved (consistency and effectiveness) information
gathering on earlier rejection of authorisations.
++
Conclusion: This policy recommendation is cost effective, by granting powers to supervisors
while ensuring an effective way of gathering information on earlier rejections, aiming to
avoid forum shopping. Therefore, Option 2 of the impact assessment endorses EIOPA’s
advice on this topic.
5.1.2. Information exchange between Home and Host supervisors in case of material
changes in cross-border activities
Issue: It is a common practice for insurers to communicate their intention to pursue cross-
border activities, but often after that, they do not immediately start cross-border activities. On
the contrary, they may start operating in other Member States only several years after the
initial notification to the Host supervisor. The Host supervisor becomes aware of activity
pursued in its territory with some delay, for instance at the moment of the distribution of
some information regarding cross-border business by EIOPA. In addition, there may be cases
where insurers change their initial business plan and to start operating exclusively, or almost
exclusively, outside the Home Member State. In such case, no specific exchange on
information between Home and Host supervisor is explicitly required by Solvency II. This
lack of information makes it more difficult for NSAs to appropriately intervene when issues
effectively arise, and the cost of late intervention is generally higher than that of more timely
intervention. This can have a negative effect on policyholder protection.
Recommendation by EIOPA: Legal requirement for Home NSA to inform the Host NSA of
material changes in the plan of operations where relevant for the Host NSA.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
Improved policyholder protection as Host
NSAs are better informed about the changes in
the plan of operations through which
policyholders could be affected.
Insurers
No material impact as the
information exchange is amongst the
NSAs.
NSAs will be better informed about the
insurers’ operations on the local market and this
will lead to more efficient communication with
the NSA.
Supervisors
More obligations for information
exchange and costs for the Home
NSA. The aim is to prevent taking
later supervisory actions which
would probably be more costly.
The Host NSA will be updated on substantial
changes in the insurers’ plan of operations and
its activities on the local market – as such it
will be better prepared to address issues if they
arise.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure an improved level-
playing field. Supervisors would be in a better position to
prevent issues. All this contributes to enhancing
++
Page | 199
policyholder protection.
Financial stability No impact identified. 0
International competitiveness No impact identified. 0
Efficiency (cost-effectiveness)
The increase in cost for the Home NSA would be
outweighed by the ability for supervisors to intervene more
timely when problems arise.
++
Conclusion: This policy recommendation is cost effective, by formalising information
exchange from Home to Host NSA in case of material changes in cross-border activities.
Early information exchange facilitates more timely intervention when problems arise (and as
such reduce the cost of supervisory intervention). Therefore, Option 2 of the impact
assessment endorses EIOPA’s advice on this topic.
5.1.3. Explicit power of the Host NSA to request information in a timely manner
Issue: Based on the current legal framework Host NSAs lack the power to request timely
answers to information requests to foreign insurers operating in their territory (e.g. questions
on conduct of business or specific product information). The Host NSA has to rely on the
Home NSA to get this information, but the current framework does not foresee deadlines or
enforcement measures regarding the lack of cooperation. If the requested information is not
provided in a timely manner supervisory issues remain unsolved and can have negative
impact on the policyholder protection.
Recommendation by EIOPA: Introduce an explicit power for the Host NSA to request
information to an insurer within a reasonable timeframe to perform its supervisory activities
more effectively.
Analysis of the recommendation:
Costs (compared to “no change”)
Benefits (compared to “no
change”)
Policyholders No cost.
Improved policyholder protection
when Host NSAs are informed in a
timely manner, which facilitates
supervisory intervention when
needed.
Insurers
Higher costs for insurers, which would have to
respond to requests from both Home and Host
NSAs.
Clear requirements for the
provision of information.
Supervisors
Less costs for supervisors as information needs
to be provided in a timely manner and repeated
requests for information will be less frequent.
More timely access to information.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality
Information requests directed to insurers would only occur
in specific circumstances when timely information is
needed.
+
Quality of supervision -
protection against failures
EIOPA’s proposals would ensure more timely (and
therefore more effective) access to information (and
therefore, possibly more timely supervisory intervention) by
Host Member States.
++
Page | 200
Financial stability No impact identified. 0
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
By facilitating timely access to information when justified,
this recommendation would improve quality of supervision.
In addition, costs would be reduced by avoiding repeated
requests.
++
Conclusion: This policy recommendation is cost effective, by providing explicit legal power
for Host NSA to request information to foreign insurers in a timely manner. This can help
prevent supervisory issues and reduce the risk of insurance failures. Therefore, Option 2 of
the impact assessment endorses EIOPA’s advice on this topic.
5.1.4. Access to minimum prudential data by Host supervisors
Issue: Host supervisors only have access to some statistical data and not prudential data.
However, in order to ensure a closer cooperation when prudential concerns may arise, it
would be needed for the Host supervisor to receive minimum timely information on the
solvency position of the insurer (solvency ratio notably), which is currently only accessible
on a yearly basis, once the public solvency and financial condition report is published.
Recommendation by the French and Italian Supervisory Authorities: Introduce a requirement
for the Home NSA to share some (limited) information on the prudential situation of the
insurer which is operating on a cross-border basis (own funds and solvency capital
requirement).
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
Improved policyholder protection as
cooperation between Home and Host
supervisors would be fostered by sharing
some prudential information.
Insurers
No costs. The information would continue
being provided to the Home NSA, which
would have to share it with Host NSAs.
Clear awareness that both Home and Host
supervisors know the solvency position of
the insurer.
Supervisors
Some costs for the supervisor to share the
information with the Host supervisor.
However, the information is directly
submitted by the insurer and the cost of
sharing the information to other
supervisory authorities remains limited.
More timely access to information for Host
supervisors who can have the information
earlier than under current rules (where they
have to wait for the publication of the
solvency and financial condition report by
the insurer).
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality
The prudential information shared with Host supervisors is
limited to basic solvency information.
+
Quality of supervision -
protection against failures
EIOPA’s proposals would ensure more timely (and therefore
more effective) access to information by Host supervisors,
which can facilitate future cooperation in case of financial
difficulties by the insurer.
++
Financial stability No impact identified. 0
Page | 201
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
The cost of sharing this information is limited, but it can
facilitate timely cooperation when problems arise. This
proposal should be read in conjunction with the one joint on-
site inspections (see subsection 4.2.2 below).
+
Conclusion: This policy recommendation is cost effective, by fostering information sharing
on basic prudential data. The Home supervisor remains responsible for compliance with
capital requirements, but the Host supervisor would be in a position to know in a timelier
manner whether cooperation with the Home supervisor is needed. This recommendation has
to be read in conjunction with the one on joint inspections (possibility for the Host supervisor
to request a joint on-site inspection in case of significant concerns on the solvency position of
an insurer operating cross-border – see subsection 4.2.2. below). This can help prevent
supervisory issues and reduce the risk of insurance failures. Therefore, Option 2 of the impact
assessment endorses this recommendation of basic prudential information sharing between
Home and Host supervisors.
Improving cooperation between Home and Host supervisory authorities,
under the coordination/mediation of EIOPA
5.2.1. Cooperation between Home and Host NSAs during ongoing supervision
Issue: Cross border activities are sometimes inappropriately supervised due to a lack of
cooperation between relevant supervisory authorities. The current obligations for NSAs to
cooperate is already foreseen in the EIOPA Decision on Collaboration. However, there is no
legal obligation for intensive cooperation between supervisory authorities during the ongoing
supervision of insurers, which operate on a cross-border basis.
Recommendation by EIOPA: Introduce a legal requirement for the Home NSA to actively
cooperate with Host NSA to assess whether insurers have a clear understanding of the risks
they cover outside the Home Member State. Efficient cooperation and timely information
exchange would improve policyholder protection by allowing more timely intervention when
deemed necessary.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
More cooperation and information sharing
allows for a more efficient supervision.
Insurers
No material impact as the information
exchange is amongst the NSAs.
No material impact.
Supervisors
Extra effort and costs for the NSAs to be
better informed on cross-border business
as part of the outcome of the supervisory
review process of the Home NSA.
NSAs would be better informed and able to
act before serious issues occur.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and
volatility
No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve cooperation, consistency
and effectiveness of supervision and ensure an improved level-
++
Page | 202
playing field and prevent later failures. All this contributes to
enhancing policyholder protection.
Financial stability No impact identified. 0
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
The increase cost for the NSAs could be seen as a prevention
for later actions. However, this not means that the extra cost
every time will be effective and will prevent insurance failures.
+
Conclusion: This policy recommendation is cost effective, by adding legal requirement for
the Home NSA to actively cooperate with the Host NSAs and to be better informed about
cross-border activities. This would ensure that sufficient resources are dedicated by Home
NSAs to the supervision of such cross-border activities. Effective collaboration information
exchange can prevent later supervisory issues. Therefore, Option 2 of the impact assessment
endorses EIOPA’s advice on this topic.
5.2.2. Strengthening the framework for joint on-site inspection for cross-border
supervision, under the binding mediation by EIOPA.
Issue: Currently, the possibility to conduct joint on-site inspections between Home and Host
NSAs is mentioned in paragraphs 4.1.1.9 and 4.1.2.6 of the Decision on Collaboration.
Therefore, such possibilities are only envisaged in non-binding tools, and are not much used,
despite some attempts by Host NSAs186
. Joint on-site inspections offer the possibility of
stronger cooperation, possibly with the involvement of EIOPA in cases where there are
strong concerns on the solvency position of insurers operating on a cross-border basis.
Recommendation by the French and Italian supervisory authorities: In cases of material non-
compliance with capital requirements (including a likely breach of minimum capital
requirements), the Host NSA should have the possibility to request to the Home NSA a joint
on-site inspection where the conclusions are co-signed (i.e. they reflect a shared view of the
Home and Host supervisors), with the possible participation of EIOPA. Where the Home
supervisor disagrees with this request, or where disagreements occur on the conclusions to
draw on the joint on-site inspection, supervisory authorities should have the possibility to
refer the case to EIOPA, which would have a role of binding mediation.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
Strengthened cooperation between
Home and Host supervisors would
improve policyholder protection.
Insurers
No material impact. Insurers can already be
subject to joint on-site inspection according to
the Decision on Collaboration.
The joint assessment by Home and
Host supervisory authorities provides
more visibility for insurers on the
remedial actions to be taken (if any) as
a follow-up of the joint on-site
inspection.
Supervisors
Extra effort and cost for the Home supervisor
to cooperate with the Host supervisor.
Stronger coordination role to EIOPA.
A joint on-site inspection would allow
186
For instance, five of the six cross-border failures which occurred in France concerned the specific business of
assurance dommages-ouvrage, where the bulk of the claims occurs, at the earliest, 10 years after the premium
was paid. Based on this experience, the French and Italian supervisory authorities are of the view that joint on-
site inspections could have facilitated the identification of issues and a common view of the situation of the
insurers concerned.
Page | 203
However, joint on-site inspection would could
only be envisaged in case of material non-
compliance with capital requirements.
a better understanding of the sources
of weaknesses of the insurer
concerned.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and
volatility
No impact identified. 0
Proportionality
Requests for joint on-site inspections would only be possible
when there is a material concern on the solvency position of an
insurer.
+
Quality of supervision -
protection against failures
This recommendation would enhance cooperation between
Home and Host supervisors and would ensure a shared view on
the situation of an insurer, which is already in material breach
of its capital requirements. EIOPA’s binding mediation role
would ensure that (i) disagreements are settled in a consistent
manner and (ii) there is no risk of abuse of request for joint on-
site inspection by Host supervisors or of refusals by Home
supervisors.
++
Financial stability No impact identified. 0
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
Cooperation through joint on-site inspection has a cost for the
supervisory authorities, but this is an effective manner to
ensure that supervisory authorities, under the coordination by
EIOPA, intensively cooperate in case of strong concerns on the
solvency of an insurer.
+
Conclusion: This policy recommendation is cost effective, by introducing the possibility for
the Host supervisor to request a joint on-site inspection only in cases of concerns of material
non-compliance with capital requirements by an insurer. This recommendation has to be read
in conjunction with Sub-section 4.1.4 (it would be possible to make such requests if the Host
supervisor has access to minimum prudential information on a timely basis). EIOPA’s
binding mediation role would ensure that there is no abuse of requests for joint on-site
inspections which would not be justified or on the contrary that the Home supervisor does not
systematically rejects such requests even when they can be justified. Similarly, the possibility
for EIOPA to settle disagreements on the conclusions to draw from an on-site inspection
would ensure more consistency in cross-border supervision. All this contributes to
policyholder protection. Therefore, Option 2 of the impact assessment endorses EIOPA’s
advice on this topic.
5.2.3. Enhanced mediation role for EIOPA in complex cross-border cases
Issue: Currently policyholders run higher risks when Home and Host NSAs disagree on how
to address a cross-border issue. This is also the case when the NSAs concerned fail to reach a
common view in the context of cooperation platforms187
. Furthermore, there are no legal
obligations to notify to EIOPA situations of deteriorating financial conditions or other
emerging risks, including consumer protection risks, posed by an insurer carrying out cross-
border activities
187
A cooperation platform is established when relevant NSAs see the merit in strengthening cooperation in case
of material cross-border business in order to enable a sound internal market in the EU. The platforms allow
Home supervisors to make use of expertise and knowledge about local market specificities from Host
supervisors.
Page | 204
Recommendation by EIOPA: The proper functioning of the cooperation platform could be
further optimised by adding an explicit reference in the Solvency II Directive to EIOPA’s
power to issue a recommendation (in accordance with Art. 16 of EIOPA Regulation) in order
to address disagreements in complex cross-border cases. Supervisory authorities concerned
would be given two months to either comply with the recommendation or justify why they
deviate from it. If EIOPA does not deem the justification appropriate, it shall make its
recommendation public together with the proposed next steps.
Analysis of the recommendation:
Costs (compared to “no change”) Benefits (compared to “no change”)
Policyholders No cost.
A supervisory recommendation from EIOPA is
to the benefit of policyholders when adequately
followed up by NSAs.
Insurers
No material impact, possible decrease
of costs (more clarity due to the
timely solution).
Clear supervisory recommendations and
timeframes give guidance to NSAs and
therefore for industry on supervisory
expectations.
Supervisors
Less costs due to shorter timeline to
find a solution for supervisory issues.
Clear supervisory recommendation give
guidance to NSAs on supervisory actions to be
taken.
Impact of EIOPA’s proposals (compared to “no change”)
Effectiveness
Long-term and green
financing
No impact identified. 0
Risk sensitivity and volatility No impact identified. 0
Proportionality No impact identified. 0
Quality of supervision -
protection against failures
EIOPA’s proposals would improve consistency and
effectiveness of supervision and ensure end of the risks of non-
action and consequently possible failures. All this contributes
to enhancing policyholder protection.
++
Financial stability No impact identified. 0
International
competitiveness
No impact identified. 0
Efficiency (cost-effectiveness)
The solution proposed has limited cost for stakeholders but can
improve quality of supervision of complex cross-border cases.
However, there is no guarantee that EIOPA’s recommendation
is followed.
+
Conclusion: Timely and efficient solutions on the follow up on supervisory issues can
prevent further escalation and higher risks for policyholders in case of non-action. The
approach remains quite modest in terms of ambition, as EIOPA’s recommendation may not
be followed. On the other hand, going further in the balance of powers between NSAs and
EIOPA would probably not get political support. Therefore, Option 2 of the impact
assessment endorses EIOPA’s advice on this topic which is a step in the direction towards
more consistent supervision under the mediation role of EIOPA.
6. INCORPORATING A MACRO-PRUDENTIAL DIMENSION IN SOLVENCY II
As part of the problem of limited specific supervisory tools to address the potential build-up
of systemic risk in the insurance sector, Option 2 – “make targeted amendments to prevent
financial stability risks in the insurance sector” is part of the overall package of “preferred
options” for the impact assessment. This option would ensure that new requirements to
Page | 205
prevent the potential build-up of systemic risks in the insurance sector are implemented in a
proportionate manner. The aim of this section is to provide some background on the sources
of systemic risk in insurance and further clarify what is embedded within the recommended
option.
In EIOPA’s view, systemic events in insurance could be generated in two ways:
- “direct” effect, originated by the failure of a systemically relevant insurer or the
collective failure of several firms generating a cascade effect188
. This systemic source
is defined as “entity-based”;
- “indirect” effect, in which possible externalities are enhanced by engagement in
potentially systemic activities (activity-based sources), like involvement in certain
products with greater potential to pose systemic risk or the existence of potentially
dangerous interconnections, or by widespread common reactions of firms to
exogenous shocks (behaviour-based source), like excessive risk-taking by insurers
(e.g. “search for yield”) or “excessive concentrations”.
It is also widely acknowledged that the insurance sector can contribute to systemic risks, but
that the traditional insurance activities are generally less systemically important than banking.
A macro-prudential approach would be justified provided that it is tailored to insurance and
implemented in a “proportionate” manner (so that it permits to tackle the sources of systemic
risks which have been previously identified, without creating unnecessary costs for the
insurance industry’s capacity to invest long-term and provide long-term services to
policyholders).
EIOPA has identified the following “operational” objectives that public authorities should
pursue to ensure the ultimate objective, i.e. financial stability:
- Ensure sufficient loss absorbency capacity and reserving;
- Discourage excessive involvement in certain products and activities;
- Discourage excessive levels of direct and indirect exposure concentrations;
- Limit pro-cyclicality;
- Discourage risky behaviour.
Solvency II already incorporates several tools with indirect macro-prudential impact, which
seek to address the risk of collective behaviour by insurers that may exacerbate market price
movements. In particular, the symmetric adjustment in the equity risk module, the volatility
adjustment (VA), the matching adjustment (MA) contribute to limit pro-cyclical behaviours
which may arise from the pure application of the market consistent valuation during periods
of short term volatility of financial markets. In addition, the extension of the recovery period
in case of non-compliance with the SCR already permits — under exceptional circumstances
— to extend (from 6 months to up to 7 years) the regulatory period that allows insurers in
breach of their SCR to take the necessary measures to restore their financial soundness
(recovery). Finally, Solvency II allows public authorities to prohibit or restrict certain types
of financial activities, although this is possible when insurers are in breach of the quantitative
solvency requirements.
Existing Solvency tools or
powers with direct macro-
prudential impact
Sources of systemic risk
addressed
Objectives
 Symmetric adjustment
for equity risk
 Collective behaviour
by undertakings that
 Limit pro-cyclicality
188
The disorderly failure of large insurers could cause disruption to the global financial system, due to their size,
the complexity of their investment and underwriting activities, and/ or their interconnectedness with financial
markets.
Page | 206
 Volatility adjustment
 Matching
adjustment189
 Extension of the
recovery period190
may exacerbate market
price movements
 Supervisory power to
prohibit or restrict
certain types of
financial activities
when there is breach of
regulatory capital
requirements
 Involvement in certain
activities or products
with greater potential
to pose systemic risk
 Excessive risk-taking
by insurance
undertakings
 Discouraging
excessive involvement
in certain products and
activities
 Discourage risky
behaviours
As some of the sources of systemic risk in insurance cannot be sufficiently prevented with the
existing tools, the recommended Option 2 would include specific tools to further limit the
build-up of risks for the financial stability and provide supervisors with additional
information to act before such risks materialise.
As part of the recommended policy Option 2, insurance companies would be required to
integrate macro-prudential consideration in their investment and risk-management activities.
In particular, insurance companies would be required to assess the macro-economic risks
(such as credit cycle downturns or reduced market liquidity) which may affect their
investment decisions and operations (i.e. the application of the “prudent person principle”)
and subsequently reflect those risks into the forward-looking evaluation of their solvency
situation (i.e. ORSA).
By expanding the “prudent person principle” 191
to account for macro-prudential
considerations, insurance companies would be incentivised to take account of the potential
behaviour of other market participants or excessive concentrations at sector level when they
analyse the diversification and liquidity of their investment portfolios. Supervisors would
thus gain additional information and insights to discourage potential excessive levels of
exposure concentration or involvement in certain activities.
When it comes to the own risk and solvency assessment (ORSA)192
, supervisors would be
able to aggregate the (expanded) information received from single insurers and detect: i)
similar/different approaches in managing specific risks by insurers; ii) common elements that
189
Under Solvency II, insurers are required to calculate the value of their liabilities using a benchmark risk-free
interest rate curve derived by EIOPA. The matching adjustment is an upward adjustment to the risk-free rate
where insurers hold certain long-term assets with cash-flows that match the cash-flows of liabilities. It reflects
the fact that long-term “buy-and-hold” investors are not exposed to spread movements in the same way that
short-term traders of such assets are. Therefore, like the volatility adjustment, the matching adjustment mitigates
the impact on insurers’ solvency position of short-term volatility in bond spreads.
190
When an insurer does not comply with its capital requirements, it is given between six and nine months to
recover. The extension of the recovery period is a provision allowing supervisory authorities to extend that
timeframe up to seven years when EIOPA declares an exception adverse situation (conditions are further
specified in the legislation). The underlying rationale is to ensure that insurers do not behave procyclically (e.g.
by selling the same “risky” assets at the same time) when a financial crisis leads to a material deterioration of
several insurance companies in a given national market. Therefore, this provision aims at ensuring that insurers
do not amplify the impact of an exogenous macroeconomic shock.
191
The “prudent person principle” as set out in the Solvency II Directive provides that insurers shall only invest
in assets and instruments whose risks the company concerned can properly identify, measure, monitor, manage,
control and report, and appropriately take into account in the assessment of its overall solvency needs.
192
The “own risk and solvency assessment” (ORSA) is an important part of insurers’ risk management process.
It aims at supporting insurers to get a holistic view of their risk profile and to understand how all risks affect the
future solvency situation.
Page | 207
may result in common behaviours across the insurance market. Insurance companies, in turn,
would benefit from the input received from supervisors and be able to further develop the
macro-prudential perspective into subsequent ORSA exercises.
In addition, insurance companies would be required to strengthen liquidity risk management
planning and reporting processes, while supervisors would be able to intervene whenever any
resulting vulnerability – for instance liquidity shortages for some maturities that may affect
the capacity to pay-out claims or benefits to policyholders in a timely manner – are not
appropriately addressed by insurers. This liquidity framework would be designed in such a
way that it ensures that supervisory intervention is a last-resort measure and that its terms
would be kept flexible and adaptable to specific situations.
Moreover, supervisors would be equipped with the power to temporarily freeze redemption
rights in exceptional circumstances, notably to restore liquidity or avoid mass surrender
behaviours, provided that those freezes are linked to (or preceded by) prohibitions of variable
remunerations, bonuses and dividend distributions for shareholders.
In fact, more generally, supervisors would be granted the power to restrict or suspend
dividend distributions and variable remunerations at individual level in exceptional situations
(e.g. during a crisis). This provision would be accompanied by adequate safeguards to ensure
that the measure is only applied when the solvency position is substantially deteriorated (or
has a prospect of being substantially deteriorated) and may result in a likely non-compliance
with the (stated) risk-tolerance limits. Such an approach would give more legal certainty to
dividend distribution policies during crisis situations affecting the totality or large part of the
insurance market (e.g. the COVID-19 crisis). Supervisors would not be entitled to impose
“blanket bans” on dividends in absence of risk-based criteria. They would remain in any case
free to recommend prudent capital management approaches at market-level and continue to
operate within the ranges of powers given by their legal mandate.
Finally, the prudential rules of Solvency II on the calculation of the counterparty default risk
under the standard formula would be amended so that banking-type loan origination activities
by insurers would not be subject to more preferential treatment than in the banking sector.
This amendment would avoid possible risks of regulatory arbitrage when it comes to
banking-like activities performed by insurers.
New macro-prudential tools
(Option 2)
Sources of systemic risk
prevented
Objectives
 Requirement for
(re)insurers to take into
account how the
macroeconomic
developments interact
with their Own risk and
solvency assessment
(ORSA)
 Excessive concentrations
 Deterioration of the
solvency position leading
to failure of a
systemically important
insurer or collective
failures of non-
systemically important
institutions as a result of
exposures to common
shocks
 Discourage
excessive levels of
direct and indirect
exposure
concentrations
 Ensure sufficient
loss absorbency
capacity and
reserving
 Requirement for
(re)insurers to take into
account how the
macroeconomic
developments can affect
their investment
activities (i.e. the
 Excessive concentrations
 Involvement in certain
activities or products with
greater potential to pose
 Discourage
excessive levels of
direct and indirect
exposure
concentrations
Page | 208
application of the
“prudent person
principle”), allowing
supervisors to assess
how (re)insurers’
activities may affect
market drivers;
systemic risk  Discourage
excessive
involvement in
certain products and
activities
 Requirement for (re)
insurers to strengthen
liquidity risk
management planning
and reporting
 Possibility for
supervisors to intervene
whenever any resulting
liquidity vulnerabilities
are not appropriately
addressed by (re)
insurers
 As a last resort measure,
possibility for
supervisors to
temporarily freeze
redemption options on
life insurance policies to
avoid “insurance run”
 Involvement in certain
activities or products with
greater potential to pose
systemic risk
 Excessive concentrations
 Potentially dangerous
interconnection
 Collective behaviour by
undertakings that may
exacerbate market price
movements (e.g. fire-sale
or herding behaviour)
 Discourage
excessive levels of
direct and indirect
exposure
concentrations
 Discourage
excessive
involvement in
certain products and
activities
 Limit pro-cyclicality
 Prudential rules are
amended so that
banking-type loan
origination activities by
insurers are not subject
to more preferential
treatment than in the
banking sector
 Involvement in certain
activities or products with
greater potential to pose
systemic risk
 Discourage risky
behaviour
 Ensuring sufficient
loss absorbency
capacity and reserving
 Discourage excessive
involvement in certain
products and activities
 In exceptional
situations, possibility
for supervisors to
restrict or suspend
dividend distributions
and variable
remunerations on a
case-by-case basis
 Deterioration of the
solvency position leading
to failure of a
systemically important
insurer or collective
failures of non-
systemically important
institutions as a result of
exposures to common
shocks
 Ensuring sufficient
loss absorbency
capacity and reserving
Analysis of the recommendation:
Costs (compared to “no
change”)
Benefits (compared to “no change”)
Policyholders Supervisory powers to limit Supervisory powers to limit surrender
Page | 209
surrender options on life
insurance contracts may be
harmful to policyholders in the
short term, but also prevent
losses in the longer term.
options would reduce financial instability
risks and possible spill-over effects on the
real economy (which could affect
policyholders as taxpayers).
Insurers
Additional regulatory costs in
terms of risk management and
reporting systems; possible costs
during exceptional crisis
situations because of dividend
restrictions.
Limited impact on their capacity to
compete at international level.
Supervisors No material cost.
Enhanced powers in crisis situations (i.e.
dividends restrictions); sufficient margin of
discretion in exercising macro-prudential
supervision.
Impact of the recommended policy option (compared to “no change”)
Effectiveness
Long-term and green
financing
The integration of macro-prudential considerations within
investment policies of insurers may refrain some types of
long-term financing (e.g. equity) when supervisors detect
possible sources of systemic risks.
-
Risk sensitivity
Option 2 would preserve the risk-based nature of the
framework, including on dividend distribution policies during
crisis situations.
+
Volatility No impact identified. 0
Proportionality
Option 2 would not generate particular costs for insurers in
terms of capitalisation, while it would require targeted
adaptations to risk management and investment policies.
+/-
Quality of supervision -
protection against failures
Option 2 would grant supervisors with a common set of
macro-prudential tools to prevent the failure of large insurers,
but it would keep the risk of supervisors acting independently
or taking uncoordinated decisions.
--
Financial stability
Option 2 would determine a tangible improvement of the
ability of supervisors to address collective
behaviours\activities that may have indirect effects on the
stability of the insurance sector.
++
International competitiveness
Although Option 2 would be largely in line with the
international framework for systemic risk, the power for
supervisors to restrict dividend distributions could increase
financing costs for European insurers compared to non-EU
ones, but the use of this power would be subject to criteria,
contributing to legal certainty.
-
Efficiency (cost-effectiveness)
Overall limited costs for the insurance industry, while
effective for supervisors to meet the macro-prudential
objectives set by EIOPA.
++
Conclusion: This policy recommendation is cost effective. It allows reinforcing the capacity
of the insurance sector to prevent the origination or amplification of risks for the financial
stability, in line with the macro-prudential objectives set by EIOPA, without creating
substantial costs for the insurance sector.
Page | 210
ANNEX 9: OTHER INITIATIVES THAT WILL HAVE A MATERIAL
IMPACT ON THE INSURANCE SECTOR
At this stage, the Commission is pursuing several initiatives to increase private financing of
the transition to a carbon-neutral economy and to ensure that climate and environmental risks
are managed by the financial system. The following initiatives will have a significant impact
on the insurance sector.
 Directive 2014/95/EU (“non-financial reporting directive” or “NFRD”) requires
sustainability-related non-financial reporting by companies, including insurers, with
more than 500 employees. That Directive and in particular the scope of the
requirement on and the modalities for non-financial disclosures are being reviewed.
 Regulation (EU) 2020/852 (“taxonomy regulation”) creates a common language for
the identification of sustainable activities. An on-going initiative aims to develop
technical screening criteria for the taxonomy in a delegated act. It is probable that the
delegated act will contain sectoral criteria for underwriting by non-life insurance and
reinsurance companies.
 Furthermore, the taxonomy regulation also requires the disclosure of key performance
indicators on taxonomy-alignment by any company in the NFRD scope. The specific
key performance indicators will be set out in a delegated act that is being prepared as
a separate initiative.
 The Commission is preparing a renewed sustainable finance strategy with a broad
scope and possible actions concerning all financial services sectors. Among others,
the strategy will aim to strengthen the foundations for sustainable investments and to
fully integrate and manage sustainability considerations into the financial system. The
review of Solvency II will be one of the elements to achieve the objectives of the
renewed sustainable finance strategy.
 As announced in the European Green Deal communication, the Commission is
pursuing an initiative to embed sustainability into the corporate governance
framework, as many companies still focus too much on short-term financial
performance compared to their long-term development and sustainability aspects.
 The Commission is also working on an initiative to align EU law with international
standards for prudential rules of the banking sector. That initiative is also looking at
the integration of sustainability risks into banking prudential rules.
Page | 211


EN EN
EUROPEAN
COMMISSION
Brussels, 22.9.2021
SWD(2021) 260 final
PART 2/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the documents
Proposal for a Directive of the European Parliament and of the Council amending
Directive 2009/138/EC as regards proportionality, quality of supervision, reporting,
long-term guarantee measures, macro-prudential tools, sustainability risks, group and
cross-border supervision
and Proposal for a Directive of the European Parliament and of the Council establishing
a framework for the recovery and resolution of insurance and reinsurance undertakings
and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and
Regulations (EU) No 1094/2010 and (EU) No 648/2012
{COM(2021) 581 final} - {SEC(2021) 620 final} - {SWD(2021) 261 final}
Europaudvalget 2021
KOM (2021) 0581 - SWD-dokument
Offentligt
Page | 212
ANNEX 10: EVALUATION OF THE SOLVENCY II FRAMEWORK
Page | 213
Table of contents
1. INTRODUCTION...............................................................................................................215
Purpose and scope ...............................................................................................................215
2. BACKGROUND TO THE INTERVENTION ...................................................................216
Description of the intervention and its objectives ...............................................................216
Baseline and points of comparison......................................................................................220
3. IMPLEMENTATION / STATE OF PLAY ........................................................................221
Description of the current situation .....................................................................................221
4. METHOD............................................................................................................................223
Short description of methodology .......................................................................................223
Limitations and robustness of findings................................................................................225
5. EVALUATION QUESTIONS............................................................................................226
6. ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONSERROR! BOOKMARK NOT DEFIN
6.1. EFFECTIVENESS .............................................ERROR! BOOKMARK NOT DEFINED.
6.1.1. To what extent has the Framework improved the risk management of EU
insurers?...................................................................... Error! Bookmark not defined.
6.1.2. To what extent has the framework increased transparency?Error! Bookmark not defined.
6.1.3. To what extent has Solvency II advanced supervisory convergence and
cooperation?................................................................ Error! Bookmark not defined.
6.1.4. To what extent has the Solvency II framework promoted better allocation of
capital resources?........................................................ Error! Bookmark not defined.
6.2. EFFICIENCY.....................................................ERROR! BOOKMARK NOT DEFINED.
6.2.1. Has the Solvency II Framework proven to be cost-efficient in delivering on
the objectives? To what extent are the associated costs justified by the
benefits it has brought?............................................... Error! Bookmark not defined.
6.2.2. Is there scope for increasing efficiency and making the rules more
proportionate?............................................................. Error! Bookmark not defined.
6.3. RELEVANCE: ...................................................ERROR! BOOKMARK NOT DEFINED.
6.3.1. Have the objectives proven to be appropriate?........... Error! Bookmark not defined.
6.3.2. To what extent is the framework still relevant/appropriate given changing
market conditions?.................................................... Error! Bookmark not defined.3
6.3.3. To what extent is Solvency II suited to deal with new challenges?Error! Bookmark not defined.
6.4. COHERENCE ....................................................ERROR! BOOKMARK NOT DEFINED.
6.4.1. How does the Directive interact with other (possibly new) EU instruments/
legal frameworks? Are there newly created overlaps, gaps or contradictions?Error! Bookmark not defin
6.4.2. Is it coherent with international developments/ international initiatives?Error! Bookmark not defined.
6.5. EU ADDED VALUE .........................................ERROR! BOOKMARK NOT DEFINED.
7. CONCLUSIONS ..............................................ERROR! BOOKMARK NOT DEFINED.5
7.1. CONCLUSIONS ON THE SOLVENCY II FRAMEWORKERROR! BOOKMARK NOT DEFINED.5
7.2. LESSONS LEARNED .....................................ERROR! BOOKMARK NOT DEFINED.8
LIST OF REFERENCES ..........................................ERROR! BOOKMARK NOT DEFINED.3
Page | 214
Table of figures
Figure 2-1: 2007 – The objectives of the Directive................................................................... 2178
Figure 4-1: Scheme of the assessed dimensions........................................................................ 2244
Figure 6.1-1: Effectiveness - General and Specific objectives - Summary.. Error! Bookmark not
defined.7
Figure 6.1-2 Average solvency ratio for EEA insurers ................Error! Bookmark not defined.0
Figure 6.1-3: Average solvency ratio per country........................Error! Bookmark not defined.1
Figure 6.1-4: Volatility adjustment: number of users per EEA country – 2019 .Error! Bookmark
not defined.3
Figure 6.1-5: Use of volatility adjustment – National market shares – 2019Error! Bookmark not
defined.3
Figure 6.1-6: Home bias - Q2 2020..............................................Error! Bookmark not defined.4
Figure 6.1-7: Levels of the 10-year yield on Italian sovereign debt and fluctuation of the Italian
VA in 2018...................................................................................Error! Bookmark not defined.5
Figure 6.1-8: Trends of unit-linked investments across the EU for the period 2005-2020Q3Error!
Bookmark not defined.7
Figure 6.1-9: GWP - Unit-linked share trend...............................Error! Bookmark not defined.7
Figure 6.1-10: Unit-linked as share of GWP-Life business across countriesError! Bookmark not
defined.38
Figure 6.1-11: Extrapolation of risk-free interest rates for the Euro (31/12/2020) ................Error!
Bookmark not defined.39
Figure 6.1-12: Comparison of extrapolated interest rates and market rates derived from interest
rate swaps (Euro, 31/12/2018)....................................................Error! Bookmark not defined.39
Figure 6.1-13: Development of written premiums in cross-border activities in Europe........Error!
Bookmark not defined.3
Figure 6.1-14: Importance of cross-border business - 2019.........Error! Bookmark not defined.4
Figure 6.1-15: Total investments of the EU insurance market (incl. unit-linked investments)
......................................................................................................Error! Bookmark not defined.0
Figure 6.1-16: Listed equity investments of the EU insurance market ........ Error! Bookmark not
defined.1
Figure 6.1-17: Total portfolio composition of the EEA insurance sector – Q1 2020 ............Error!
Bookmark not defined.1
Figure 6.1-18: Investment split in the EEA insurance market - 2016-2019. Error! Bookmark not
defined.2
Figure 6.1-19: Public Consultation – treatment of equity investments ........ Error! Bookmark not
defined.3
Figure 6.2-1: Public consultation: SFCR .....................................Error! Bookmark not defined.6
Figure 6.2-2: Scope - Percentage of companies within and outside the scope of Solvency II, by
Member State, 2019 ...................................................................Error! Bookmark not defined.58
Figure 6.2-3: Proportionality in Reporting - Exempted companies by EEA Member State..Error!
Bookmark not defined.1
Figure 6.2-4: Number of templates to be reported - 2019............Error! Bookmark not defined.1
Figure 6.3-1: Low interest rate - Composition of portfolios - 2020............. Error! Bookmark not
defined.4
Figure 6.3-2: Life insurance balance sheet: Impact of a decrease in interest rates ................Error!
Bookmark not defined.5
Figure 6.3-3: Risk-free rate curve ................................................Error! Bookmark not defined.5
Figure 6.3-4: Investment Portfolio - 2020..................................Error! Bookmark not defined.69
Page | 215
Figure 6.3-5: Evolution of failure and near miss events ..............Error! Bookmark not defined.2
Figure 6.3-6: “Taxonomy” - Potentially eligible Investments - 2019 .......... Error! Bookmark not
defined.4
Figure 6.3-7: EIOPA’s severe scenario........................................Error! Bookmark not defined.5
Figure 6.3-8: Assets over liabilities: stress test for natural catastrophes...... Error! Bookmark not
defined.6
Page | 216
1. INTRODUCTION
Purpose and scope
The Directive on the taking-up and pursuit of the business of Insurance and
Reinsurance1
is also known as the Solvency II Directive. The Solvency II Directive, as
amended by the Omnibus II Directive2
, has entered into application in 2016. The
supplementing Delegated Regulation3
was then intended to further specify a range of aspects
of the Solvency II Directive, with the aim to facilitate a consistent implementation throughout
the European Union. Those two levels of legislation form the “Solvency II Framework”, or
“regime”.
Two major grounds led to a necessary review of the framework:
First, there is a legal mandate set out in the Directive to review certain areas of the
framework, namely:
i. Long term guarantee measures and measures on equity risk (Art.77f(3));
ii. Standard formula for solvency capital requirements (Art.111; in particular for market
risks);
iii. Minimum capital requirements (Art.129);4
iv. Group supervision (Art.242), including crisis management and adequacy of the
existing insurance guarantee schemes.
Second, there is a need to assess whether the implementation and/or harmonisation have been
sufficient5
, whether the original objectives have been sufficiently addressed, as well as
whether newly emerged objectives are sufficiently reflected. The evaluation is therefore
targeted at the identified weaknesses, in order to prepare for a focused review of the Directive
and of the accompanying Delegated Regulation.
1
Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up
and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 17.12.2009, p. 1.;
consolidated version of 13 January 2019.
2
Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives
2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No
1095/2010 in respect of the powers of the European Supervisory Authority (European Insurance and
Occupational Pensions Authority) and the European Supervisory Authority (European Securities and
Markets Authority), OJ L 153, 22.5.2014, p. 1.
3
Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC
of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and
Reinsurance (Solvency II).
4
A dedicated EIOPA survey launched to NSA’s showed that the vast majority of them do not face any issue
with regard to the calculation of the MCR (see Section 6.4 of the general Consultation paper).
5
Throughout this evaluation annex any reference to harmonisation of rules is meant as harmonisation of
prudential rules for insurers. Other sets of rules, e.g. insurance contract law, are not within the scope of this
note.
Page | 217
2. BACKGROUND TO THE INTERVENTION
Description of the intervention and its objectives
The third generation Insurance Directives6
adopted in the 1990's established an “EU
passport” (single licence) for insurers7
, based on the concept of minimum harmonisation and
mutual recognition. These Directives acknowledged the need to review EU insurance
solvency rules and Solvency I was agreed by the European Parliament and the Council in
2002.8
Although already providing increased powers to supervisors and setting out rules for
establishing prudent technical provisions and a required solvency margin, the Solvency I
regime still proved too simplistic. It was static and not risk sensitive9
, with consequences on
the assessment of each insurer's risks, on the supervisory process and on the allocation of
capital, not reaching an allocation which is efficient in terms of risk and return for
shareholders.
That initiated the process towards Solvency II. The Solvency II Directive sets out the key
principles underpinning a new solvency system, supplemented by the Delegated Regulation10
as mentioned above. The
6
Directives 92/49/EEC and 92/96/EEC.
7
Please note that in the rest of the document, the terms “insurance” (resp. “insurers”) has to be understood as
covering both “insurance and reinsurance” (resp. “insurers and reinsurers”).
8
Directives 2002/12/EC and 2002/13/EC.
9
Static refers to the fact that in brief, the solvency margin was calculated formalistically taking into account
only the liabilities for a life insurance company, only the annual amount of premiums or the average burden
of claims for a non-life insurance company. Two insurers A and B with the same contracts and the same
liability or premium structure would have the same solvency margin. Insurer A could keep all his assets in
cash, and insurer B could invest all his assets into equity. This would not have had any impact on the
solvency margin, i.e. the solvency capital requirement under Solvency I.
10
The Delegated Regulation covers numerous and very technical aspects of the operationalisation of the
Solvency II Directive. They concern in particular capital requirements and other measures relating to long
term investments, the requirements on the composition of insurers' own funds, remuneration issues,
requirements for valuation of assets and liabilities, and reporting and disclosure.
Page | 218
Figure 2-1 below shows the whole set of objectives set for the Directives, with the expected
impact of each operational objective on the specific ones. In turn, these are designed to reach
the general objectives set which, for the Directive, were the following11:
1) Deepen the integration of the EU insurance market;
2) Enhance the protection of the policyholders;
3) Improve the international competitiveness of EU insurers and reinsurers.
11
It has to be noted that the impact assessment supporting the legislative proposal for the Directive also had as a
general objective to “promote better regulation”. While this is of course an implicit objective of all
legislative proposals, it has been considered specifically relevant to mention for the Solvency II Directive
because the setting up the Solvency II framework meant to codify and recast the existing (14) Insurance
Directives. It has not been identified as raising any specific issue and will therefore not be subject to specific
evaluation.
Page | 219
Figure 2-1: 2007 - The objectives of the Directive
Source: Commission (2007) Staff Working Document – Impact Assessment Report.
The Delegated Regulation set an additional objective, namely:
4) Foster growth and recovery in Europe. The specific objective defined in order to
reach this general objective was to promote long-term investment.
The Solvency II framework – structure
Aiming at these general objectives, the Solvency II Directive sets out the key
principles underpinning the new solvency system, including the overall architecture which
aims to translate the operational objectives. Solvency II constitutes a three-pillar
framework (capital requirements, governance, transparency), which is risk-based and
market-based. Further, the new regime allows insurers to invest according to the “prudent
person principle”12
and capital requirements will also depend on the actual risk of
investments. How does it work in brief?
The “Pillar 1” sets out quantitative requirements, including the market-based rules to value
assets and liabilities13
(in particular, provisions for the future payments to policyholders in
relation to their insurance obligations, so-called “technical provisions”), the general design of
12
Article 132 of the Solvency II Directive: “[…] insurance and reinsurance undertakings shall only invest in
assets and instruments whose risks the undertaking concerned can properly identify, measure, monitor,
manage, control and report, and appropriately take into account in the assessment of its overall solvency
needs […]”.
13
Assets and liabilities are valued at the amount for which they could be exchanged between knowledgeable
willing parties in an arm’s length transaction. The insurance company’s assets consist mainly of the
investments made with the insurance premiums insurers receive. They generally comprise bonds, equities
and real estate (held directly or through investment funds). The liabilities consist mainly of technical
provisions set up for the obligations of the insurer.
Page | 220
the standard formula for solvency capital requirements. The capital requirements are risk-
based, forward-looking and economic, i.e. tailored to the specific risks borne by each insurer
and taking into account risk diversification benefits, allowing an optimal allocation of capital
across the EU. They are defined along a two-step ladder, including the solvency capital
requirements and the minimum capital requirements, in order to trigger proportionate and
timely supervisory intervention.
To start with, insurers have to set up the above-mentioned technical provisions. Solvency II
requires those technical provisions to be a “best estimate”14
of the current liabilities relating
to insurance contracts (i.e. claims provision plus premium provision), plus a risk margin15
.
Technical provisions are then discounted to take into account the time value of money.
Discounting has a significant impact on the size of technical provisions, the higher the
discount rate the lower the technical provisions. Under Solvency II technical provisions are
discounted with risk-free interest rates.16
As Solvency II prescribes a market-consistent valuation of assets and liabilities, a decrease in
interest rates results in an increase in the values of both assets and liabilities. Whether the
global impact is positive or negative will then depend on the relative sensitivity of assets and
liabilities to changes in interest rates. The sensitivity depends on the duration of both the asset
and liability side. In general, the duration on the liability side is higher and therefore this side
is more sensitive to interest risk change.
The framework is designed in such a way that an insurer complying with its requirements is
supposed to be able to cope with an extreme adverse event, whose probability of occurrence
is only 1 in every 200 years. In other words, the insurer is then supposed to be able to meet its
obligations to policyholders and beneficiaries over the 12 following months, with a 99.5%
probability. Hence where the insurer complies with these risk management rules, the risk of
an insurance failure over the following year should reach a very low probability (even though
not null).
The level of capital resources available to an insurer to do so is measured by the ratio of own
funds – difference between assets and liabilities – over the solvency capital requirements
(SCR): it is the so-called “solvency ratio”. In turn, the Solvency Capital Requirement (SCR)
is the total amount of own funds that insurance companies are required to preserve. The
standard SCR is a formula-based figure calibrated to ensure that all quantifiable risks are
considered (including non-life underwriting, life and health underwriting, market, credit,
operational, and counterparty risks).17
It represents the level of financial resources (excess of
14
The “best estimate” is the expected present value of future cash flows, using the relevant risk free yield curve,
based upon current information and realistic assumptions.
15
The risk margin represents the potential costs of transferring insurance obligations to a third party should an
insurer fail. It is calculated as the product of a cost-of-capital rate (currently set at 6%) and of the present
value of expected future capital requirements stemming from holding insurance contracts.
16
The technical provisions reflect the future cash-flows taking account of the time value of money (expected
present value of future cash-flows), i.e. the opportunity cost. In other words, an insurer could invest the
current present value risk-free with the risk-free interest rates. Article 77 (2) imposes the use of the relevant
risk-free interest rate term structure.
17
If the supervisory authorities determine that the requirement does not adequately reflect the risk associated
with a particular type of insurance, it can adjust the capital requirement. Beside the standard formula,
Solvency II also introduced the possibility to use (full or partial) internal models to estimate solvency capital
Page | 221
assets over liabilities and the subordinated liabilities) that enables insurers to absorb
significant losses and that gives reasonable assurance to policy holders and beneficiaries that
payments will be made as they become due. The Minimum Capital Requirement (MCR) is a
lower, minimum level of security below which the amount of insurers' own funds should not
fall, otherwise supervisory authorities may withdraw authorisation (automatic supervisory
intervention).
The rules embedded in this pillar address the operational objectives (see
requirements, subject to approval by the NSA on the basis of several requirements also laid down in the
Directive (Articles 112 to 127).
Page | 222
Figure 2-1 above) to: i) harmonise the calculation of technical provisions; ii) introduce risk-
sensitive harmonised solvency standards. They aim to facilitate different specific objectives,
in particular to improve risk management of the EU insurers, and provide for a better
allocation of capital resources.
“Pillar 2” consists of requirements for the governance and risk management of insurers, as
well as the details of the effective supervisory process with competent authorities; it ensures
that the regulatory framework is combined with each company’s own risk-management
system and informs business decisions. The provisions embedded in this pillar mainly
translate the operational objectives of harmonised supervisory methods, tools and powers and
of efficient supervision of insurance groups and conglomerates, which should support
advancing the supervisory convergence and cooperation as well as increasing transparency
and encouraging cross-sectoral consistency (see
Page | 223
Figure 2-1 above). It also fosters the enhancement of the risk management practices.
A key Pillar 2 requirement is the “own risk and solvency assessment” (ORSA), which also
forms an important part of the supervisory review process. It aims at supporting insurers to
get a holistic view of its risk profile and understand how risks affect the future solvency
situation (through identification, assessment, measurement, management and reporting). It
requires that the insurer undertakes its own “stress testing”, integrating all foreseeable risks
such as a volatile and uncertain economic outlook. It also implies that insurers, when defining
their own “risk appetite”, may (shall) look beyond the “purely quantitative” solvency
requirements, and set level of “reserve”/available capital that are also forward-looking, as an
additional cushion beyond the minimum regulatory quantitative requirements.
Finally, “Pillar 3” focuses on reporting to supervisory authorities (another harmonisation
objective) and disclosure to the public, thereby enhancing market discipline and increasing
comparability. Solvency II introduced quarterly reporting and increased qualitative
disclosure. Pillar 3 requirements directly address the specific objectives of increased
transparency and improved risk management, as well as supervisory convergence and
cooperation (see
Page | 224
Figure 2-1 above).
In addition, in order to avoid that small insurance companies are subject to excessive
regulation costs, the principle of proportionality is an integral part of the Solvency II regime.
It takes two forms/layers. First, as regards the scope, Solvency II provides (Art.4) that very
small insurers are excluded from the application of the Directive if they meet a series of
cumulative criteria, including limited revenues (lower than EUR 5 million) and business
volume (insurers’ liabilities towards policyholders of less than EUR 25 million). The second
layer of proportionality embedded in Solvency II aims at a proportionate application of the
regime to small and less complex companies, where the intensity of the supervisory review
process is commensurate to the “nature, scale and complexity” of each company which is
subject to Solvency II. The framework as a whole is formulated in a modular manner, such
that insurance and reinsurance companies must only apply those requirements, which are
relevant to the risks they incur.
On the other hand, only insurers that have obtained a licence/authorisation to operate in one
EU Member State under Solvency II rules are allowed to operate in another Member State,
based on the freedom of establishment (FoE) or the freedom to provide services (FoS). This
is the so-called “EU passporting” system. It implies that insurance companies which are
excluded from the scope of Solvency II have no permission to do so. The passporting system
for cross-border insurance business further highlights the key importance of good supervision
convergence and coordination, in order to enable a consistent EU supervision that protects the
interests of policyholders and beneficiaries.
Baseline and points of comparison
Acknowledging the economic and social importance of the insurance sector,
intervention by public authorities in the form of prudential supervision is necessary. Insurers
are expected to provide to the customers an adequate protection against potential future losses
and, as “institutional investors”, they are also an essential participant in the financing of the
“real economy” as they channel households’ savings into the financial markets and the real
economy.
Intervention by national public authorities has typically targeted the insolvency risk of
insurers, or aimed to minimise the disruption and loss caused by insolvency. This is due to
the characteristics of the insurance sector, where: i) premiums are collected upfront; ii)
obvious information asymmetries exist between the insurer and the policyholder. The latter
understands much less what are the risks faced by the insurance company as well as the near
future of the former’s solvency position; as to the insurer, he can only assess the risk profile
of the policyholder if the latter discloses all relevant information honestly18
; and iii) the
interests of the two contracting parties are also different (the insurer wants to maximise
profit, while the policyholder cares for an affordable premium and wants to get a quick, full
and fair settlement of their claim).
18
In addition, once insured, policyholders may also change their behaviour (moral hazard).
Page | 225
Although Solvency I updated the EU regime in 200219
, before Solvency II the lack of risk
sensitivity of the existing EU regime did not provide regulatory incentives for insurers to
manage their risks properly, or improve and invest further in risk management, and did not
facilitate accurate and timely intervention by supervisors, nor optimal allocation of capital.
The Impact Assessment20
accompanying the Solvency II Directive reported that “given the
importance of insurers as institutional investors in European capital markets, the lack of risk
sensitivity of the required solvency margin [under the Solvency I regime] not only results
[resulted] in a sub-optimal allocation of capital between lines of business and across the
industry, but also throughout the economy as a whole”.
In an attempt to address the weaknesses, Member States had introduced national rules in
addition to Union-level solvency requirements (usually strongly linked to the country-specific
insurance culture and practice), resulting in widely diverging regulatory requirements and
supervisory practices throughout the EU. The key underlying difference between the national
approaches was the importance attached to technical provisions and capital requirements.
Other differences were related to the eligibility and valuation of assets as well as the
quantitative limits applied to investments. The persistent lack of harmonisation increased
costs for EU insurers, undermined the proper functioning of the Single Market as well as their
international competitiveness. Likewise, weaknesses in risk management combined with lack
of harmonisation also resulted in uncertainty and higher or uneven risk for the policyholders.
The supervision of groups was also a growing issue. The lack of real supervisory
convergence and coordination, as well as the differing national rules imposed significant
administrative burden and costs on insurance groups operating in more than one Member
State. The gap was widening between the way groups are managed and supervised in
different Member States, which increased costs for insurance groups but also increased the
danger that some key group-wide risks might be overlooked.
Finally, the International Association of Insurance Supervisors (IAIS), developing new
solvency standards and valuation rules of technical provisions, was moving towards a risk-
based and market-consistent approach. Likewise, Basel II had introduced a more risk
sensitive capital regime in the banking sector. This lack of international and cross-sectoral
convergence was a risk to the competitiveness of insurers, while also increasing the
opportunities of regulatory arbitrage. The problems clearly requested further EU intervention.
Indeed, while preserving the “principle-based” nature of the framework, an integrated EU
insurance market and a level-playing field for EU insurers require harmonisation, technical
(e.g. calculation of technical provisions, risk-sensitive solvency standards) and operational
(e.g. supervisory methods and tools).
Consequently, the present evaluation assesses the framework against the baseline of the 2002
framework, the last update of Solvency I before Solvency II. Its major weakness was a lack
of risk sensitivity (see footnote 9 about the static approach to capital requirements) and the
national attempts to address this weakness resulted in diverging regulatory requirements and
supervisory practices.
19
See section 0.
20
COM (2007), Staff Working Document - Solvency II Impact Assessment Report.
Page | 226
3. IMPLEMENTATION / STATE OF PLAY
Description of the current situation
As mentioned above, the Solvency II Directive supplemented by the Delegated
Regulation form the “Solvency II Framework”.
As to the transposition of the Directive, the Commission services started the completeness
check and conformity check of the transposition in 2015 and in October 2017 respectively.
The conformity check lasted until June 2018. Its focus was to analyse and verify the
conformity of the 27 (then 28) Member States national transposing measures for the most
essential provisions of Solvency II. These are in particular provisions referring to general
supervisory powers, information to be provided for supervisory purposes, cooperation and
exchange of information between supervisory authorities, provisions regarding the
transitional period, non-compliance with the solvency capital requirement, non-compliance
with the minimum capital requirement, equivalence with third countries and the relevant risk-
free interest rate term structure which is used to value the technical provisions21
.
From July 2018 until July 2019, an informal dialogue with the national authorities was
initiated by the Commission services, trying to clarify and/or rectify those national provisions
which seemed, prima facie, not to be conform to certain provisions of Solvency II. However,
in July 2019, 5 infringement cases were opened against and 8 political letters were sent to
these Member States which still did not conform their transposition of the assessed provisions
of Solvency II. To date (March 2021), the largest majority of the issues have been solved at
national level and only two infringement cases are still pending22
.
In the context of implementation, the European Insurance and Occupational Pensions
Authority (EIOPA) promotes a common supervision culture and consistent supervisory
practices across the EU member states. It has therefore a key role in bringing a more
harmonised and consistent application of the rules across the EU insurance market. In
particular, the Questions and Answers (Q&As) process, allowing insurers, national
supervisory authorities (NSAs) and other stakeholders to clarify the implementation of the
framework with EIOPA, shows some issues or questions regarding the interpretation (e.g.
application of technical rules in specific situations). However, due to their non-binding
nature, there is no assurance that the answers to the Q&As are actually followed by all
Member States. There may also remain tensions with other existing national legislation. The
peer reviews conducted in recent years by EIOPA and the NSAs also show some differences
in implementation, confirming that rules can be interpreted differently. The peer review on
EIOPA’s Decision on the collaboration of the insurance supervisory authorities actually
identified divergent practices among NSAs in a number of areas.23
These are in particular: the
authorisation of a new insurance company - in case of previous authorisations sought in other
Member States or where the applicant intends to operate exclusively in another Member State
21
Technical provisions (insurance liabilities towards policyholders) represent the biggest part of the liabilities of
an insurance company.
22
Both cases relate to Article 260 (parent undertakings outside the union).
23
See EIOPA (2020d).
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- or the notification process for freedom of establishment (FoE)/ freedom to provide services
(FoS) activities.
Hence, since 2016 when it entered into application, the Solvency II prudential framework has
been implemented with some variability by the NSAs. Where part of this flexibility can be
attributed to the principle of “supervisory discretionary judgement”, there continues to be
some ambiguities or discrepancies that lead to inconsistencies and legal uncertainties, and
prevent a full clarity in the implementation of the framework. It is the case, for instance, for
aspects in the calculation of the best estimate of technical provisions, the definition of
expected profit in future premiums, decisions related to internal models, the interpretation of
recital 127 of the Delegated Regulation at group level24
, the so-called “intervention ladder”25
in case of financial deterioration or measures related to recovery and resolution26
.
4. METHOD
Short description of methodology
In order to gain a broad view on the functioning of the Solvency II framework, various
perspectives and angles are considered. In addition to EIOPA’s reports and data, other
stakeholders were consulted via a public hearing and an open consultation. In addition,
Member States could contribute in “expert group” meetings. All findings and views were
analysed together in order to extract a coherent analysis and better identify the common
trends ad well as meaningful discrepancies.
 Involvement of EIOPA
To support its work on the review, DG FISMA sent a comprehensive “Call for
Advice” to the European Insurance and Occupational Pensions Authority (EIOPA)27
. The
final report from EIOPA has been published on 17 December 2020. In the meantime, EIOPA
has continued a number of Solvency II working groups, consisting of experts from the
national supervisory authorities to prepare its technical advice. It has published a consultation
paper28
in October 2019, and undertaken several data collections since autumn 2019.
 Other public consultation
In parallel, DG FISMA has also engaged in a dialogue with stakeholders. It organised
a public hearing29
on the review on 29 January 2020 which drew around 350 participants. It
published its inception impact assessment, and launched an open public consultation on
“Have your Say”, which ran from 1 July to 21 October 2020 and received 73 contributions.30
DG FISMA also organised several debates with Member States in the context of dedicated
“expert group” meetings on insurance issues. The Commission Services have maintained
close contact with key stakeholders and have also followed international developments,
24
See EIOPA’s Advice (2020), paragraph 1.34 and 9.58.
25
See Solvency II Directive (EUR-Lex link), chapter VII.
26
See EIOPA (2017): “Opinion on the harmonisation of recovery and resolution framework”.
27
Formal request, 11 February 2019 (available at this link).
28
EIOPA's Consultation Paper.
29
Conference - website.
30
Solvency II on the « Have your Say » page.
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including the work of the International Association of Insurance Supervisors (IAIS) and the
International Accounting Standards Board (IASB).31
 Back-to-back evaluation – main dimensions
The Solvency II framework is comprehensive and there are lots of interactions
between the different dimensions/provisions. Further, each specific objective (as defined in
the 2007 impact assessment32
) normally serves more than one general objective, and
inversely, each general objective is expected to be achieved through different specific
objectives. The evaluation therefore needed to be drafted around a meaningful structure. In
other words, while including all dimensions of the framework, the present “targeted”
evaluation works as follows: it builds upon the findings of the consultation activities listed
above, as well as on other specific reports and studies.33
Those sources and consultation
activities allowed to identify weaknesses and/or opportunities for improvement. The present
evaluation can therefore be built around the main (cross-cutting) dimensions where such
weaknesses and/or opportunities have been identified. To do so, it assesses the degree of
achievement of the specific objectives related to those dimensions. These assessed objectives
are presented in Figure 4-1 below. The figure is based on the objectives as identified in the
impact assessment for the Directive (see Fig. 2.1 above), but also includes the additional
objectives introduced with the Delegated Regulation (boxes filled in blue).
Figure 4-1: Scheme of the assessed dimensions: Directive + Delegated Act
Source: Commission services.
Note 1: The blue stars mark all the general and specific objectives of the Delegated Regulation. Filled in blue are the
additional o je ti es, i.e. those that ere ne l identified for the Delegated Regulation.
Note 2: Two additional operational objectives identified in the 2007 impact assessment - compatibility of prudential
supervision with the banking sector, as well as promote compatibility of the Framework with the work on the international
scene – ha e een addressed the setting of the Dire ti e’s risk-based and market-consistent rules, in line with the cross-
31
http://www.iaisweb.org, http://www.iasb.co.uk,
32
See COM (2007), Staff Working Document – Solvency II Impact Assessment Report.
33
See list of references in the end of the annex.
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se toral and international rules/ orks. The third additional one, Codif and re ast the e isting 14 Insuran e Dire ti es
consists in setting up the Solvency II framework and directly concerns a general objective of better regulation. They have
not been identified as raising any specific issue and will therefore not be subject to specific evaluation.
Note 3: Although not identified as such in the 2007 SWD – impact assessment, financial stability can be seen as a general
additional dimension; it has been added at last in the Directive. Therefore, in parallel with the work building up the Solvency
II framework, the present evaluation also considers (and mentions) the financial stability dimension while assessing the
different specific objectives.
Limitations and robustness of findings
The present evaluation builds upon the findings of consultation activities, as well as on
other specific reports and studies. The caveats to apply for the surveys are mainly the self-
selection bias and a limited number of respondents.
The analysis targets the main dimensions where weaknesses and/or opportunities have been
identified. It assesses the degree of achievement of the specific objectives related to those
dimensions. In particular, due to the difficulties in obtaining reliable cost estimates and the
lack of means to quantify the general benefits of the Solvency II framework, it has not been
possible to carry out a full quantitative assessment of its efficiency at EU level.
In particular, when analysing cost estimates reports, it has not been possible to identify the
impact of measures that were formally imposed by the Solvency II framework but had
already been applied before as industry’s good practice. In such cases, certain costs could be
attributed to the application of Solvency II while they had already occurred before.
Furthermore, Solvency II allows to apply for the use of an internal model. This is a voluntary
decision of the insurance undertaking. It does imply costs for the development of such an
internal model, although these costs are “voluntary”. In addition, the application of the
internal model provides the undertaking and the supervisory authorities with a more accurate
picture of the insurance undertaking and a potential relief in capital requirements.
In general, as the objectives of the framework are closely linked, and often correlated, it has
been difficult, sometimes impossible to quantify the specific impact of each measure on the
different objectives. It is thus necessary to rely on more qualitative findings, stakeholders’
reports and supervisory assessment.
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5. EVALUATION QUESTIONS
5.1. Effectiveness
Has the Directive been overall effective in reaching its general objectives, i.e. to
increase the EU insurance market integration, to enhance the protection of
policyholders and beneficiaries and improve competitiveness of EU insurers?
Specific objectives assessed34
:
 To what extent has it improved the risk management of EU insurers?
 To what extent has it increased transparency?
 To what extent has it advanced supervisory convergence and cooperation?
Has the framework been effective in achieving its additional objective to foster
growth and recovery? More specifically:
 To what extent has the framework promoted better allocation of capital
resources?
5.2. Efficiency
 Has the Solvency II Directive proven to be cost-efficient in delivering on the
objectives? To what extent are the associated costs justified by the benefits it
has brought?
 Is there scope for increasing efficiency and making the rules more
proportionate?
5.3. Relevance
 Have the objectives proven to be appropriate?
 To what extent is the framework still relevant/appropriate given changing
market conditions?
 To what extent is Solvency II suited to deal with new challenges?
5.4. Coherence
 How does the Directive interact with other EU instruments/ legal frameworks?
Are there newly created overlaps, gaps or contradictions?
 Is it coherent with international developments/ international initiatives?
5.5. EU added value
 Compared to the previous national approaches, has Solvency II resulted in a
more consistently applied regime across all Member States?
1. Has it facilitated the integration of the EU insurance market and
supported the competitiveness of EU insurers compared to a scenario
without the Solvency II framework?
2. Has it better enhanced policyholders’ protection?
3. Has it fostered growth and recovery better than a “no-Solvency II”
scenario?
34
Three specific objectives had been set in order to facilitate these general ones: (i) to improve risk
management, (ii) to increase transparency and (iii) to advance supervisory convergence and cooperation. When
the framework is effective with regard to these objectives, it will logically also contribute to the general
objectives. The degree of achievement of the general objectives is therefore assessed through the following
specific objectives.