These measurement flaws needlessly restrict insurers from playing their key role as providers of long-term savings and pension products, including those with guarantees, which customers value and that could play an important role in addressing serious societal challenges, such as the ageing of society.
They also unnecessarily restrict insurers from making long-term investments that are essential for Europe’s economic recovery and sustainable growth. Furthermore, these flaws undermine the ability of European firms to compete internationally with non-European insurers.
Addressing these measurement flaws would lead to a justified overall reduction in capital requirements and operational burdens, and so increase insurers’ capacity to take investment and other risks. Such targeted improvements are therefore very important, both for the sector, and Europe’s society and economy at large.
To achieve this, the review of Solvency II should lead to:
• A more appropriate valuation of liabilities by both addressing technical flaws in the volatility adjustment (VA) and risk margin, and by maintaining components that work, such as the current extrapolation methodology and the matching adjustment.
• A more appropriate measurement of capital requirements in the standard formula by maintaining the dynamic VA as is for internal model users and extending it in combination with the current spread risk charges for standard formula users. The criteria for long-term equity should be improved and the calibration of property risk corrected. Changes to allow for appropriate negative rates in the interest rate calculation should also be introduced.
• A less burdensome operational framework by simplifying and streamlining reporting requirements.
• A more diversified and efficient insurance market through a better application of proportionality, so that insurers can comply with Solvency II in line with the scale, nature and complexity of their activities.
Moreover, improvements to Solvency II should maintain, and even enhance the risk-based nature of the framework, by more appropriately capturing insurers’ long-term business model and the actual risks that the industry is exposed to. This way, the level of policyholder protection will remain very high and financial stability will be strengthened.
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