Best’s Special Report: EIOPA’s Solvency II proposals seek to reform a very particular regime

19 February 2021


As Solvency II celebrates its fifth anniversary, the European Commission is moving forward with a review of the system that will shape its operation over the coming years. A new report by ICMIF Supporting Member AM Best, A Very Particular Regime — EIOPA’s Solvency II Review Advice examines some of the Solvency II reform proposals put forward by the European Insurance and Occupational Pensions Authority (EIOPA) and outlines the implications for European insurance companies.

As the Commission moves forward with changes to Solvency II, AM Best expects one of the issues under the spotlight will be the discount rates used at long durations. AM Best highlights in the report that EIOPA’s proposals make a start in reforming the often-uneconomic nature of these discount rates. Insurers use rates derived from an Ultimate Forward Rate set by regulation. EIOPA’s proposals to lower discount rates are expected to have a clearly visible impact in reducing available capital under Solvency II, most particularly for life insurers in Germany and the Netherlands.

However, the effect of changes to discount rates would be offset for many insurers by EIOPA’s proposed reform of the risk margin, which would substantially reduce its size for longer duration contracts.

Although UK data is no longer included in EIOPA’s work, AM Best estimates UK annuity writers would see a reduction of the order of 20% or more in their risk margin under the proposals, with an associated increase in available capital. This means that the UK review of Solvency II, also underway at this time, is unlikely to be limited by equivalence concerns in its own approach to the risk margin, should such concerns be a consideration.

The European Commission will also be considering EIOPA’s proposals to harmonise Insurance Guarantee Schemes (IGSs) across the EU. IGSs operate on a national basis to compensate policyholders following insurer failures. AM Best sees the proposals as a marker of a maturing group solvency supervision system, as without a degree of harmonisation group supervision may be diminished by the actions of national supervisors looking to protect their domestic policyholders.

While EIOPA’s advice, if implemented, would have the disadvantage of adding to complexity in the regime, AM Best’s believes the proposals make a start in moving Solvency II somewhat closer to providing an economic picture of insurers.

Click here to access a complimentary copy of this special report.

Click here to view a AMBestTV video with Tony Silverman, Director, Credit Rating Criteria Research & Analytics, AM Best, about the report.

For member-only strategic content on the cooperative/mutual insurance sector, ICMIF members have exclusive access to a range of online resources through the ICMIF Knowledge Hub.

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