EUROPE – The Basel Committee’s “softer” approach on liquidity requirements for banks will not necessarily anticipate or accelerate a similar change in the Solvency II framework, the European Insurance and Occupational Pensions Authority (EIOPA) has confirmed.
Asked whether European pension funds could take heart in the recently revised Basel III rules, Carlos Montalvo, executive director at EIOPA, told IPE that “insurance is not banking”.
“Solvency II is an independent regulatory process that, in terms of capital charges, has been testing different alternatives and approaches for the last 10 years,” he said.
“This has benefitted from a longer timeframe that has allowed us to collect a sufficient level of information to back the proposals we are making. Such proposals, whilst not perfect, are a good and sound starting point for Solvency II.”
Montalvo went on to say that EIOPA saw no link between the banking and insurance debates, nor did it see a need for any type of change, particularly if that change were triggered by “external decisions” unrelated to the Solvency II legislative process.
Montalvo also pointed out that a “clear” distinction needed to be made between the concepts of solvency capital requirements and liquidity buffers.
Whilst the first refers to the amount of capital needed to cover unexpected losses up to a certain confidence level – 99.5% in a one-year time horizon under the Solvency II framework – the latter seeks to ensure that banks have sufficient, readily realisable assets to manage a sudden, short-term outflow of funds.
“Because of the implementation in Solvency II of the so-called ‘prudent person principle’, insurers do not face prescriptive lists of eligible assets,” Montalvo said.
“They are free to invest as they deem appropriate, but must rather actively manage their investments in a prudent manner, in line with the nature and structure of their liabilities.
“The capital charges will be aligned with both the underlying risk of assets held, and the diversification strategy of the undertaking. In other words, more risk will mean more capital.”
A report released by the European Actuarial Consultative Group on the comparison of the regulatory approach in insurance and banking refers to the same distinction.
It points out that Solvency II aims to ensure that expected future liability is covered by assets before consideration of capital, which is to be held over and above this.
By comparison, Basel III’s objective is to ensure that the lender has sufficient provision or capital to support its expected losses over the course of the coming 12 months and support any unexpected credit losses.
Last week, industry experts warned that the Basel Committee’s decision to soften capital-requirement rules for banks was unlikely to soften European regulators’ hearts on other issues.
“As our industry repeatedly says, and I fully believe, insurance is not banking, so I am convinced they will not try to link both debates in order to reduce capital requirements,” Montalvo said.