According to Richard Weurding, the Association's general secretary, Solvency II offers a sound framework for insurers, "but adjustments are needed. Unnecessarily high capital buffers not only lead to higher costs for insurers, they also impact on the position of insurers as institutional investors. This role is important in European terms, among other things for achieving the European 'Green deal' objectives, including investment in the energy transition. And 'last but not least', Weurding stresses, "for policyholders, higher capital costs ultimately lead to higher premiums. EIOPA can prevent this, for example by making the rules to dampen short-term market fluctuations better suit (Dutch) insurance products."
Dampening extreme market conditions
Dampening measures in Solvency II include the Matching Adjustment (MA) and the Volatility Adjustment (VA). Under the current rules, only Spain and the United Kingdom can apply the MA in practice – whereas, for the purposes of creating a level playing field, this instrument ought to also be widely applicable within Europe. The Association also proposes modifying the VA, designed to achieve a dampening effect on the value of liabilities in more extreme market conditions.
For the Dutch market, it is important to include mortgages into the VA in a different way. Currently, mortgages are treated in the same way as corporate bonds, whereas the risks attached to mortgages are much lower. Based on their long-term investment horizon, Dutch insurers invest relatively heavily in mortgages, because mortgage investments have a good risk-return ratio. As a result, insurers contribute significantly to stable financing of the Dutch housing market.
No need to modify LLP
EIOPA is also evaluating the way in which the Last Liquid Point (LLP) is determined and is exploring several options. Some of those options will result in insurers having to maintain unnecessarily high buffers. Under the current rules, insurers are well placed to respond to interest rate changes. New insurance products are based on the assumption of lower interest rates. Existing life insurance policies with long-term obligations are covered by long-term liabilities. For this reason, the Association is not in favour of changing the existing rules.
Level playing field
EIOPA is making all kinds of proposals to create a level playing field. The Association strongly supports this but stresses that “one size fits all” solutions do not always work. Insurance products differ as a result of national (fiscal and civil) legislation. The Association feels that EIOPA needs to take this into account.
Greater proportionality by reducing administrative burden
Back in July 2019, the Association called for a reduction in the administrative burden for non-complex small and medium-sized insurers. EIOPA has met this request in part by increasing the turnover threshold for the applicability of Solvency II. In addition, the Association also wants to reduce the administrative burden for insurers who meet specific criteria, while keeping the rules and the protection of policyholders the same.
Onward process
EIOPA is currently evaluating the Solvency II directive at the request of the European Commission (EC). EIOPA will be making a recommendation to the EC by the end of June, based on the consultation, the responses from parties including the Association and Insurance Europe and an impact study. The EC will evaluate this recommendation and is expected to make a proposal to amend Solvency II in late 2020. This proposal will be presented to the Council of the European Union and the European Parliament for a decision.