In a letter from the DG FISMA (the Directorate-General for Financial Stability) of the European Commission dated 18 July 2016, the Commission asks EIOPA for technical input to a review of the Solvency II regulatory framework focusing on three areas[1]:

  • proportionate and simplified application of the requirements,
  • removal of unintended technical inconsistencies, and,
  • removal of unjustified constraints to financing.

The deadline of the technical input 31 October 2017 and should include final technical advice as well as a cost-benefit analysis. The review itself will be performed during 2018 by the Commission.

Proportionate and simplified application of the requirements

Solvency II replaced 28 national regimes by a single risk-based framework, and even though the delegated regulation itself (EU2015/35) contains numerous provisions on proportionality the Commission believes that further work could be done to ensure that all requirements are proportionate to risks.

Removal of unintended technical inconsistencies

Here, the Commission mentions significant weaknesses experienced by stakeholders, e.g. non-life risk calibrations, and consistency between sectors taking into consideration the various business models of the financial institutions. Also mentioned is consistency with other regulatory frameworks such as CRR/CRD and EMIR, and undue reliance on credit ratings.

Removal of unjustified constraints to financing

Stakeholders has pointed out that the Solvency II framework may have unintended effects on long-term investments, such as creating barriers to certain asset classes, e.g. infrastructure that was already mentioned in 2015 where further recalibrations are under consideration. The Commission want to see further work within in this area identifying any other investments that may justify improved risk sensitivities.

What to expect

According to the detailed request from the Commission to EIOPA, the following areas of the rules governing the standard formula calculation of the solvency capital requirement can potentially receive updates sometime after 2018:

  • Further simplifications – allowed simplifications may be extended to modules not covered by any simplification today, and existing simplifications may be enhanced to further reduce cost for smaller insurance undertakings
  • Refined look-through rules – enhanced simplifications to allow proportionate and risk-based calculations of the SCR, in particular reducing the reliance on external ratings , and possible extension to include related undertakings in the look-through approach
  • Non-life catastrophe risk calculations - Reduced complexity, and refined methods, assumptions and parameters
  • Removal of unintended technical inconsistencies – in particular additions to the framework for the use of alternative credit assessments to also target exposures that do not have an external credit assessment
  • Non-life premium and reserve risk, and life mortality and longevity risk - refined calibration of stress parameters
  • Third-party guarantees – possible increased consistency between Solvency II and the banking framework in Directive 2013/36/EC w.r.t. to the treatment of third-party guarantees
  • Risk mitigation techniques – updates to the framework for the recognition of risk mitigation techniques, especially w.r.t. the qualitative criteria that the risk mitigation techniques must fulfil in order to ensure that the risk has been effectively transferred to a third party
  • Counterparty risk for central counterparties and derivatives – updates of methods and parameters
  • Loss-absorbing capacity of taxes – simplification of the methods used to calculate the loos-absorbing capacity of taxes
  • Life, non-life and health - extended scope for using undertaking specific parameters
  • Risk-margin – changes in the methods and assumptions w.r.t. to the changed market environment, and refinement of the cost-of-capital rate
  • Own-funds – harmonisation of treatment of own-funds items between Solvency II and the banking frameworks

References

  1. Request to EIOPA for Technical Advice on the Review of Specific Items in the Solvency II Delegated Regulation