THE European insurance and reinsurance federation said that the many layers of conservativeness built into the design of Solvency II and its tendency to treat insurers like traders instead of long-term investors could harm consumers, long-term investment and the economy.

Olav Jones, deputy Director General of Insurance Europe, commented: “As demonstrated by the results of the recent European Insurance and Occupational Pensions Authority (EIOPA) stress tests, Europe’s insurers have done a great job of implementing Solvency II, despite the significant challenges they faced. For example, EIOPA reported that 100% of companies tested met their minimum capital requirements (MCR) and 99.98 percent met the much higher Solvency Capital Requirement (SCR).

However, just because insurers have enough capital to cope with this conservative approach does not mean it is not wasteful or will not have consequences. Important improvements are needed to ensure that the framework works as intended, justifies the huge cost and effort involved in developing, implementing and operating it, and to avoid unnecessarily disincentivising insurers from making much needed long-term investments in the European economy.”

Issues that require attention include the need for capital requirements to reflect the true risks that insurers face. Currently, when insurers make long-term investments, Solvency II treats them as if they are short-term traders and bases the risk measurement on short-term risks. While there has been work to address this issue, unnecessary barriers to investment and costs remain, impacting all forms of long-term investment including equity, corporate bonds and property.

Unless fully addressed, this could have a range of negative effects, including reduced long-term investment by insurers, lower returns and less protection for policyholders and insurers, which can be pushed towards more pro-cyclical behaviour. Insurance Europe also suggests a simplifications and practical application of the proportionality provisions allowed by Solvency II.

This will help Solvency II to become more workable in practice and avoid unnecessary costs for all insurers, and is particularly important for small and medium size insurance companies. In addition, Insurance Europe would like to see more appropriate calibrations and methods to better reflect the true risks and liabilities in several specific areas including longevity risk, catastrophe risk and currency risk.

Jones said: “The industry has strongly supported Solvency II and its shift towards a strong risk-based approach. However, for this to work, it is vital that the risks are measured in the right way and it is not excessively conservative. The ongoing work regarding the Capital Markets Union, the current Solvency II SCR Review and the wider Solvency II review to be completed by 2020, provide the perfect opportunities to make these important changes and ensure that Solvency II works, and avoids causing harm to consumers, the economy or our industry.”