If the European Insurance and Occupational Pensions Authority’s (EIOPA) response to the Solvency II review is implemented, A.M. Best says it would expect to see increases to best-estimate liabilities (as measured under Solvency II), mostly offset by decreases in the risk margin and the effect of a larger volatility adjustment under the proposals. EIOPA’s advice was in response to the European Commission’s request for advice arising from its mandatory review of Solvency II. The Solvency II directive, which came into effect on 1 January 2016, is an EU law that codifies and harmonises the EU insurance regulation. In December 2020, EIOPA stated in its report that the Solvency II framework is “working well and no fundamental changes are needed at this point in time”. However, EIOPA suggested that a number of adjustments are required to ensure that the regulatory framework continues as a well-functioning risk-based regime. While EIOPA’s advice, if implemented, would have the disadvantage of adding to complexity in the regime, A.M. Best says the proposals make a start in moving Solvency II “somewhat closer to providing an economic picture of insurers”. One issue that A.M. Best has raised is around discount rates at long durations. It highlights in the report, that EIOPA proposals make a start in reforming the often-uneconomic nature of the discount rates. Insurers use rates derived from an ultimate forward rate (UFR) set by regulation. A.M. Best says 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 rating company highlights that 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, A.M. Best suggests that annuity writers would see a reduction of the order of 20 per cent 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 is unlikely to be limited by equivalence concerns in its own approach to the risk margin, should such concerns be a consideration The EC 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. A.M. Best explains that 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”. It adds: “Without such harmonisation, national supervisory authorities may act (in the course of normal supervision, as well as recovery and resolution exercises) on narrow objectives around protecting policyholders within their own territories, thus constraining fungibility of capital.” When EIOPA published its report in December, the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE) revealed that it was disappointed with EIOPA's advice to the European Commission on the Solvency II Review.
