AM Best's Special Report: EIOPA's Solvency II Review Advice - Very Particular Regime

18 February 2021 — Daniela GHETU
AM Best has issued a Report named "A Very Particular Regime - EIOPA's Solvency II Review Advice" which examines some of the Solvency II reform proposals, concluding that the proposals will make a start in moving Solvency II closer to providing an economic picture of insurers.

The proposals are issued by the European Insurance and Occupational Pensions Authority (EIOPA) and outline the implications for European insurance companies.

According to the report, AM Best expects that 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. The discounted 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.

In the report, AM Best also included the U.K. data even in it is no longer part of EIOPA`s data and estimates that U.K. 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 U.K. 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 harmonize Insurance Guarantee Schemes (IGSs) across the EU. Without such harmonization, national supervisory authorities may look to protect their domestic policyholders, thus constraining fungibility of capital within insurance groups.

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. AM Best sees regulatory solvency regimes as important commercial constraints for insurers and also as potentially significant indicators of insurer balance sheet strength.

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