The consequences of the coronavirus crisis are far-reaching: on the one hand there are calls for an easing of social restrictions on the other hand there are health concerns. Politicians, the business community and society are aiming for a good compromise between economic prosperity and our own and our families’ welfare.
Take Norway as an example. The country is helping itself to a record sum from its sovereign wealth fund with assets under management of more than USD 1 trillion. The government is set to withdraw in the region of EUR 38 billion this year. These difficult economic times justify this withdrawal, which far exceeds the preset limit. A sovereign wealth fund is tempting – even if its main purpose is to provide for the people's retirement.
Or consider the German Federal Financial Supervisory Authority (Bafin), whose President Felix Hufeld said: “We have adapted our supervisory framework conditions in line with the crisis”. Regarding life insurers, Hufeld clearly states: “The situation does not currently pose an existential threat. Granted, solvency ratios will fall. We know that from our survey covering a sample of life insurers. However, none of the companies surveyed are underfunded. This is also due to the flexibility of the Solvency II transitional provisions, which are proving very helpful for us – and most of all for the sector.”
On the subject of flexibility, I would like to mention the European insurance supervisory authority Eiopa – the third example: on its homepage Eiopa has published a new timetable for its ongoing Solvency II review in order to assess the impact of the coronavirus pandemic. The new timetable presents a compromise by taking account of the current crisis while, at the same time, not delaying the timing for too long to enable the implementation of planned adjustments to Solvency II. Eiopa will now make its recommendations to the EU Commission at the end of December 2020.
In my view, a slight delay of the Solvency II review is worthwhile to reflect the impact of the coronavirus. That said, the postponement shouldn't be too much longer as it is a regular review and dependable regulation is indispensable to reliable planning in our sector.
Fact: it is hard to say how the coronavirus crisis will impact insurers’ solvency ratios over the long term. There are a number of negative effects to consider: falling share and bond prices have been reducing the value of investment portfolios since the start of the year. The crisis has impacted new business, leading to reduced premium income. Insurance reserves could increase due to falling interest rates. Operational risk is also under review. All these factors can influence solvency valuation and cause ratios to fall.
The sector is aware of the challenge posed by the coronavirus epidemic
Nonetheless, I am confident because our sector is proving agile and adaptable in the face of the crisis: life and P&C insurers’ solvency ratios were adequate prior to the crisis. A review of the additional information in the annual SFCR reports shows that the sector is aware of the challenge posed by the coronavirus epidemic: insurers regularly conduct detailed assessments of various scenarios, including pandemics and how they affect solvency levels. With new digital processes and employees working from home insurance companies are ensuring business continuity. They also have various risk management tools and methods at their disposal, such as hedging equity positions against losses.