The Mario Draghi era is over. The head of the European Central Bank undoubtedly showed strong leadership during the euro crisis. However, to this day Draghi is synonymous with an extremely loose monetary policy that entails significant risks, with the obvious consequences for savers – as well as our industry. Moreover, it would appear that Draghi’s successor Christine Lagarde has no plans to deviate from this course for the foreseeable future.
Regulatory framework conditions compatible with interest rate reality
The topic is also front and centre for supervisory authorities: at the Annual Insurance Supervision Conference last week, german Bafin stated insurers needed to show in detail the extent to which the low rates are jeopardising their business model and their contribution to retirement provision. We do that consistently and emphatically – however our main interest is in having a regulatory framework that accounts for the interest rate situation while also giving our sector some breathing space.
The current Solvency II review is a case in point. The EU Commission mandated the European Insurance and Occupational Pensions Authority EIOPA to perform this review, which is due for completion by mid-2020. It is an extensive exercise covering capital requirements, reporting, proportionality and everything in between. Granted, Solvency II cannot be an exercise in fair weather regulation, but it also needs to remain constructive during difficult market spells.
For example, we cannot exclude tightening capital requirements, which brings us back to the interest rate issue. We will therefore push hard to ensure EIOPA considers all the issues including extrapolation, volatility development and interest rate risk.
As regards amending reporting obligations, there should be two main objectives: First, the currently very detailed reports should take into consideration the information requirements of different audiences – from supervisory authorities to customers. Second, this means tailoring the reports to different target groups, thus delivering tangible benefit to supervisory authorities and the corporate sector: reports will not add transparency if no-one reads them.
In fact, EIOPA has already suggested that the Solvency and Financial Condition Reports (SFCR) be oriented more to their target readership. That’s a first step. The next step would logically be to concentrate on delivering quantitative information to the professional readership. Hard figures instead of lengthy prose.
Proportionality should be the norm and not the exception as it has been hitherto
The same applies to strengthening proportionality, a subject close to my heart that is finally getting the attention it deserves through the 2020 review. The main question is: how can the principle of proportionality be fully applied in supervisory practice? Our response is clear: we need unambiguous and reliable direction as to which relaxations are available under which conditions.
What does that mean? As much as necessary, but as little as possible. Good regulation must ensure a high level of security and financial stability, while also permitting growth and innovation.
Jörg vom Fürstenwerth