Analysts at AM Best believe that new Solvency II proposals put forward by the European Insurance and Occupational Pensions Authority (EIOPA) will give rise to both “winners and losers” in the European re/insurance market.
The proposals are EIOPA’s response to the European Commission’s request for advice arising from its mandatory review of Solvency II, which commenced in 2020 in line with the Commission’s obligations under legislation.
If EIOPA’s advice is implemented, AM Best expects to see increases to best-estimate liabilities under Solvency II, mostly offset by decreases in the risk margin and the effect of a larger volatility adjustment under EIOPA’s proposals.
The comments come after the PRA confirmed that its review of Solvency II measures will aim to tailor the rules specifically for the UK market.
In particular, regulators are looking at the design of the risk margin in Solvency II rules, which are currently seen as too sensitive to the level of interest rates.
“The result in times of low interest and discount rates has been an unrealistically high risk margin, particularly for longer duration products (such as traditional life products in Germany and the Netherlands, and annuities in the UK),” AM Best noted.
EIOPA proposals also suggest measures that would reduce the risk margin, with the reduction being a function of the duration of each policy.
However, AM Best believes that the actual effect of the proposed change on an insurers’ risk margin “will vary according to its product mix.”
AM Best further observed the progressive development of group solvency regulation under the EIOPA’s advice and in, particular, the efforts to harmonise recovery and resolution across the different countries of the EU.
“In the view of AM Best, this is a marker of a maturing EU group supervision regime,” the rating agency said. “Without such harmonisation, national supervisory authorities may act … on narrow objectives around protecting policyholders within their own territories, thus constraining fungibility of capital.”