On 8 March 2019, the EC released several proposed amendments to the Standard Formula of Solvency II, which contained several interesting points. The update comes in the context of the European Commission’s lengthy Solvency II review process, which is set to finish in 2021, five years after its official start date.
The amendments are meant to help insurers finance their liabilities more easily in this low-interest rate environment, similar to broader EU investment-related initiatives. The European Parliament and the Council will scrutinize the proposals for three months and, if no changes are necessary, they will be published and 20 days later enter into force.
Meanwhile, the European Insurance and Occupational Pensions Authority (EIOPA) is working on a second, more extensive document of technical advice about Solvency II. This document should be given to the EC in June 2020, and ratified in 2021. While the EC’s 2019 review is mainly about simplifications, EIOPA’s review should include more crucial guidance like addressing the existing constraints for long-term guarantees (LTGs).
Why does this matter to insurers?
Solvency II has majorly affected insurers’ investment strategies by affecting the design, market pricing, and availability of insurance products.
According to a 2018 Insurance Europe survey, “58% of the respondents offering long-term savings products with guarantees said that Solvency II has had a negative effect on those products. And 48% said that Solvency II has led them to invest less than optimum amounts in equities, long-term bonds, private placements or unrated debt.”
Policyholder protection has driven the insurance authorities’ careful approach to investments. However, it has also created an unnecessary burden for insurers who are not market speculators and instead follow a buy-and-hold asset strategy. The amendments to the regulation are also expected to affect the non-life-insurance business, especially regarding simplifications to the catastrophe risk as well as the calibration of premium and reserve risk.
This article has been written by Alberto Messina.