A recent information request issued by the European Insurance and Occupational Pensions Authority (EIOPA) suggests a set of potential changes that could be made to enhance Solvency II standards for insurers, according to AM Best.
EIOPA began the latest phase of its Solvency II review on March 4th with a request for insurers to complete scenario-based returns to help the Authority assess possible changes in the European solvency regime.
The regulatory oversight body had already published a consultation paper on possible outcomes from the Solvency II review in October 2019, but in February it received a formal request for advice from the European Commission.
EIOPA was originally scheduled to deliver its advice based on this review in June 2020, but the deadline for insurers to respond has been extended by two months as part of EIOPA’s reaction to the increasing disruption from the coronavirus (COVID-19) outbreak.
AM Best believes the request is likely to come ahead of changes to enhance solvency ratios, but noted that EIOPA has also discussed changes to the discount rate used in Solvency II, which would result in a significant strengthening of reserves for life insurers.
The rating agency believes that, when taken together, the mix of changes could provide a pragmatic outcome for regulators.
Comparing the latest information request to EIOPA’s earlier consultation, AM Best noted that the Authority has now asked for changes to the risk margin under Solvency II.
The request also continues the argument that Solvency II returns should contain more details on non-available own funds, suggesting these concerns have remained unresolved since the October consultation.
In addition, EIOPA’s request features other potential changes that would increase stated solvency ratios and therefore offset potential discount rate changes.
And finally, AM Best believes that the request gives some insight into how EIOPA’s thinking on the extension of the last liquid point (LLP) of the risk-free interest rate term structure has developed.
EIOPA is now asking for data on the alternative extrapolation method, which analysts see as more favourable to solvency ratios than extending the LLP, suggesting this is the most likely outcome on discount rate changes.