In February 2019, the European Commission called on the European Insurance and Occupational Pensions Authority (EIOPA) to deliver technical advice in preparation of the review of the European prudential supervisory regime for insurers, Solvency II. After nearly two years of extensive consultations and numerous workshops and meetings, EIOPA presented its final advice today. The result is an opinion in which EIOPA focuses on the technicalities of the regime rather than showing a path towards the consistent and convergent application of the regime.
At a recent event held by Insurance Ireland on Solvency II, the aims of the review were described as optimising the regulatory framework. If this is the benchmark, there is significant room for improvement for the European Commission before presenting its legislative proposal in the second half of 2021.
The review cannot only look at the regime itself and focus on an internal EU or a Member State perspective. Instead, the review must have clear objectives of the further integration of the EU single market for ensuring and safeguarding the global competitiveness of the European insurance industry.
In this broader picture, the Solvency II review can be an essential element of the ambitious plans of the European Commission and co-legislators to pursue a sustainable recovery of the EU economy and society from the Covid-19 crisis, the Next Generation EU initiative. Addressing the shortcomings of the framework, namely its over-complexity and existing miscalibrations (e.g. of the risk margin), can unlock significant potential in the industry to provide the cover and the investments which are indispensable for economic growth.
The same holds true for the EU Green Deal. The ability of insurers to make the necessary investments in sustainable projects and to close protection gaps for climate-related risks can be enhanced or hampered by Solvency II depending on the outcome of this review. Only the day before the publication of the technical advice, EIOPA presented its great ambitions on sustainability to stakeholders. It appears that EIOPA makes significant efforts to discuss these issues, however, the technical advice falls short in delivering the fundamental regulatory basis which would be necessary for the transposition of these ambitions.
In contrast to creating the crucial link between policy and technicality, EIOPA published an inconsistent set of proposals. In general, most of the suggested improvements are outweighed by additional requirements or are not going far enough by itself. Throughout the process, EIOPA explained that it takes “a balanced approach”. However, our view is that the improvement of a system or its optimisation must not identify a “balance” as its target. For example, the newly proposed macroprudential tools will present a substantial burden and the suggestions for central elements, like the risk margin and the measures improving the reporting and disclosure requirements, fall short in delivering significant improvement.
One of the core asks of the European Commission’s call for advice is the consistent application of the principle of proportionality across the EU. It is positive that EIOPA is drawing from a discussion paper which the Dutch and Irish insurance associations published in 2019 in its advice. The aim of the approach is to reduce the governance burden on the application of the principle by 1) identifying concrete tools for the proportionate application of Solvency II and 2) amend the application process for the use of the tools. The acknowledgment of this fundamental idea is a milestone. However, the criteria which EIOPA defines to determine if an undertaking can apply the tools are likely to create challenges. Even more importantly, EIOPA significantly undermines the integrity of the single market with defining that an insurer which is carrying-out its business across the single market poses a bigger risk than an insurer only active in a single Member State. Such an approach must not be expected.
With regards to the supervision of cross-border insurance, EIOPA suggests amendments which reflect the positive signals of EIOPA’s recent statement specifically on cross-border supervision. The idea of the identification of core information to be shared between National Competent Authorities (NCA), a first careful step to improve the governance of cooperation (platforms), is positive. EIOPA also repeats some of its positions which it already expressed during the review of its establishing regulation in 2018. While we support a mandate for EIOPA to intervene where NCAs fail to fulfil their tasks appropriately, some of its proposals remain to be harmful for the integration process, i.e. a materiality threshold for the information sharing and an empowerment allowing host NCAs to directly request information from insurers rather than using the prescribed process. Again, EIOPA’s ideas can be seen as a step in the right direction, but they do not present significant improvement towards the integration of the single market.
Closely linked to the further integration of the market are the proposals on Recovery & Resolution and Insurance Guarantee Schemes. EIOPA suggest a minimum harmonisation and a consistent approach on both aspects. The Irish insurance industry welcomes and supports these suggestions. With regards to the concrete proposals, it will be important that none of these measures are an opportunity to compromise fair competition in the EU single market needs.
In consequence, EIOPA’s opinion is a missed opportunity to set a clear sign for the further integration of the EU single market for insurance. Furthermore, EIOPA adds to the complexity of the system creating significant additional regulatory hurdles. It will be on co-legislators to take EIOPA’s opinion into account when delivering on a review which optimises the supervisory regime and allows insurers to play their role in the EU economy and society