The EU Commission’s decision on the changes to the Solvency II Directive has to find the right balance between different aspects of the review, according to panellists at an annual event organized by the German Association of Actuaries (DAV) that took place last week.
“We need to look at a balanced outcome at an individual country level because the insurance business is still very national and still has very national components,” said Claudia Donzelmann, global head of regulatory and public affairs at Allianz.
Donzelmann noted that since its implementation in 2016 the Solvency II framework has proven to work well, including in times of crisis during the pandemic.
Wilhelm Schneemeier, chair of the board of the Actuarial Association of Europe (AAE), agreed that Solvency II was a “success”, most importantly because “all was decided on sound, quantitative impact assessments” as interest rates were falling year on year.
The insurance and pension industry is now ready “to provide the real economy with long-term stable and sustainable financing” and “to contribute to the EU recovery, to the green transition and also to close the pension gap,” Donzelmann said.
Without the right balance, Schneemeier said “we have problems because the ability to invest in risky assets will be lower and the probability of a pension gap will be much higher”.
The last few years have shown that the Solvency II framework is “excessively conservative on one side, also compared on a global level, and it has some flaws,” Donzelmann added.
The review is therefore an opportunity to address such flaws in order to unlock the potential to contribute to the European goals and better serve clients, she added.
The Solvency Directive II review is “really just in time” as negative interest rates have become a reality, Schneemeier said.
The head of the insurance and pensions unit at the European Commission, Didier Millerot, pointed out that finding a way to adjust Solvency II’s framework to the low interest rate environment is certainly one of the “most contentious issues”.
EIOPA’s proposals under fire
Donzelmann said that the European Insurance and Occupational Pensions Authority (EIOPA) has put forward a series of proposals that, if implemented or adopted as they are, would result in an “even more conservative system and even higher volatility”.
She added: “We need to be very, very careful with that in order to keep the strengths of the insurance industry and keep it competitive on the global market.”
EIOPA has proposed a new method to extrapolate risk-free interest rates, which would lead to a more realistic assessment of liabilities, the authority said last December.
Insurance & Pension Denmark (IPD) in March said in a statement that EIOPA’s proposals in the EU’s Solvency II regulation review go too far.
“We believe as an industry that the changes to the methodology are not needed because there are enough measures in the current methodology that can be used in order to reflect the low interest rate environment,” Donzelmann explained.
EIOPA is on the right path, she said, but “we believe that more can be done in order to make the volatility adjustment more effective and to avoid procyclicality.”
AAE can agree on many topics, on proposals for metric adjustment and risk margin, but “we completely disagree with changing the end point,” Schneemeier said.
Frank Grund, executive director of German supervisory authority BaFin, agreed that Solvency II has proven to be “stable and robust” during the crisis. “We did not see much volatility [and] the insurance business was a stabilizing factor in the economy,” he added.
In his opinion, the EU Commission should strike a balance “per country and especially for product lines, for [a] long-term business, that was from the beginning our main objective in the discussions at EIOPA.”