Macro­pru­den­tial Fra­me­work: No need to rein­vent the wheel

Currently, both on the global and the European level, there are requlatory initiatives to further strengthen macroprudential supervision of the insurance industry. They aim at enhancing the stability of the financial system and reducing systemic risk. A GDV-Paper summarizes the positions of the German Insurance Industry on systemic risk and macroprudential policy in insurance. It also provides a detailed assessment of the potential new macroprudential instruments currently under discussion.

Insurers’ business activities depend crucially on financial stability. Therefore, the German insurance industry supports an effective macroprudential policy. When evaluating potential further measures a holistic view is essential. Both, the potential sources of systemic risk and the macroprudential impact of the existing regulatory framework, should be taken into account. 

The framework currently in place for European insurers (e.g. macroprudential aspects of Solvency II, stress tests, regular risk dashboards and financial stability reports by EIOPA, macroprudential monitoring by the ESRB) already goes a very long way to effectively address potential systemic risks from the insurance sector. In order to avoid restrictive and unnecessary new provisions that would negatively impact the economic capacity and the social role of the insur-ance industry, any enhancement of the macroprudential framework should be guided by the following overarching principles:

  • A comprehensive impact assessment of any potential new macro-prudential tool should routinely be performed, taking into account both expected benefits and direct as well as indirect costs arising from the new tool.
  • Decisions on macroprudential tools should be based on the actual relevance of theoretically possible systemic risks, which are not yet sufficiently addressed by the existing framework.
  • A strict application of the principle of proportionality is essential, based on the actual level of risks a business model or activity implies for the stability of the financial system.
  • The work on macroprudential policy tools in Europe must be in line with global developments, thereby ensuring a level playing field across jurisdictions.
  • Taking these principles as guidelines, we have substantial concerns regarding the current discussion on potential additional tools, in particular:
  •  Assessment of relevant systemic risks not sufficiently evidence-based (e.g. liquidity risk);
  • Lack of full consideration of existing Solvency II measures (e.g. capital buffers, recovery plans, payment restrictions, reporting tem-plates);
  •  Insufficient targeting and risk sensitivity of potential tools (e.g. capital surcharges, leverage ratios and liquidity ratios);
  • Substantial operational implementation challenges and cost considerations not fully taken into account (e.g. ORSA enhancement, additional reporting requirements or plans).

In our view, the focus should be on reducing counterproductive effects in the current supervisory system. E.g. we strongly support an improvement of the volatility adjustment under Solvency II.

Finally, macroprudential policy is only one element in the overarching task to ensure financial stability. There is a wide range of opportunities for policymakers to strengthen financial stability, which promise in our view to be much more effective than additional macroprudential measures. For example, completion of the European Capital Markets Union would enhance cross-border capital flows, leading to decreased concentration risks and a better cushioning of exogenous shocks to the financial system and the economy.

The following GDV-Paper summarizes the positions of the German Insurance Industry.

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