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How to make proportionality work – Concrete policy proposals

Proportionality is a key principle in Solvency II – however, its application shows severe deficits in practice. In consequence, insurance companies must hold back capital that could be better used for investments contributing to important European projects such as the Green New Deal. In its most recent position paper, the GDV highlights the importance of clear criteria that lead to automatic exemptions based on the risk profile of a company.

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Risk-based regulation instead of over-regulation

Reducing cost is only one aspect among others 

Simplifying rules not only reduces the complexity and the costs for companies, but also unfolds valuable resources: risk managers and supervisors can better focus on more important things, while long-term investments are fostered. In this way, a broader and more consistent application of proportionality can contribute to a more sustainable and digital economy in Europe. „We need rules that better focus on the relevant risks. This will benefit companies as well as consumers: The focus on relevant risks promotes the stability of the general system”, argues Jörg Asmussen, Chairman of the Management Board at GDV.

A toolbox for consistent and risk-based exemptions 

The starting point of every exemption must be the individual risk profile of companies. This basic risk assessment should be based on concrete criteria and lead to automatic exemptions for low risk undertakings. The GDV proposes a toolbox: Based on the solvency ratio (SCR), the volatility of SCR and the ratio of eligible funds to balance sheet total, companies should be allowed to apply simplified calculations for capital requirements (pillar I), as well as simplified requirements for governance (pillar II) and reporting (pillar III). Asmussen: “Companies need to be able to apply allowed exemptions. That is why we recommend an automatic application: Insurance companies may apply exemptions, if they meet predefined risk-based criteria. A complicated approval procedure by the supervisory authorities can then be dispensed with.”

Of course, national supervisory authorities always should be able to interdict the automatic application, but also justify their decision towards the affected company.