European Parliament plans for Solvency II reform balanced
It has been almost two years since the European Commission tabled its first proposals for a review of the supervisory and regulatory framework known as Solvency II. Now the European Parliament has agreed its position.
The German insurance industry considers the proposals of the European Parliament (EP) for the revision of the supervisory law Solvency II to be balanced. “The suggested changes to the capital requirements reflect the risk of negative interest rates more appropriately while at the same time giving insurers room to make long-term investments, for example in the transformation of our economy”, said Jörg Asmussen, CEO of the German Insurance Association (GDV). Especially the rules for the long-term interest rates insurers use to value their liabilities are more relaxed in the Parliament's proposal than in the Commission's plans. “What's important is to get those reasonable solutions over the finish line now.”
Something that, in the eyes of the GDV, still needs some work, however, is easing the extensive reporting requirements for smaller insurers. “Applying the proportionality principle automatically in future is the right thing to do, however we would like to see more of the smaller insurance companies benefit from those proportionality rules, too”, Asmussen explained. This doesn't have to be at the expense of safety, he said. “We do want those companies to play by Solvency II rules, but they should be allowed to do it in a way that is appropriate to them”, the GDV CEO elaborated.
Resolution plans need to account for national guarantee schemes
A better reflection of the proportionality principle is something the GDV would also like to see in the Insurance Recovery and Resolution Directive (IRRD), a legislative proposal that has been developed as part of the Solvency II review and that the European Parliament voted on today as well. “It is reasonable for companies and supervisors to prepare for future crises. What is not reasonable, however, are one-size-fits-all rules that ignore the risk an individual company poses for the stability of the financial system. Moreover, existing guarantee schemes on the national level such as the “Protektor Lebensversicherungs-AG” in Germany should be taken into account, too,” Asmussen pointed out.
Now that the European Parliament has established its position on the Solvency II review, the process can move on to the next step, the so-called trilogues. These are informal negotiations between representatives of the Parliament, the Commission and the Council which is composed of EU member state's heads of state or government. A little over than a year ago, the Council voted on its position after the European Commission had submitted its regulatory proposal in September 2021. Whether the trilogue phase will be completed before the European elections in June 2024 remains to be seen but it is possible.
Introduced in 2016, Solvency II was designed as a risk-based regulatory system. Instead of imposing rigid rules it gives insurers more wiggle room, for example in their investments – as long as they have enough equity for their exposure. When Solvency II was introduced, a review procedure had already been planned to assess the impact of the rules and to improve them. This is what the current review process is about.