At the turn of the year, Solvency II has finally entered into force, confronting the European insurance industry with a true shift of paradigm. The tremendous complexity of the new supervisory framework leaves a lot of leeway for misinterpretations. For this reason, I have already pointed out a year ago that we would need to continuously explain the changes and principles brought about by Solvency II and regularly evaluate and explain its results. We have done just that: On the web, in our publications and at the technical level. Only yesterday we have informed journalists about Solvency II at a workshop in Frankfurt.
German insurers‘ capitalisation above European average
One year after the start, it is time to take stock: The launch of the new supervisory regime has been successful. Despite the on-going decline in interest rates, solvency ratios – i. e. the ratio of an insurer’s own funds to the solvency capital requirements (SCR) under Solvency II – of German insurers show that they are adequately capitalised. Compared to their European counterparts, their capitalisation is even above-average, as figures of European supervisor EIOPA demonstrate. But, above all: We expect the solvency ratios of life insurers as of 1 January 2017 to look better than the results published at the end of the first quarter of 2016.
No need to reduce the Ultimate Forward Rate at this point
Despite all predictions to the contrary: The insurance companies have adapted quite well to the historically low interests and to the new provisions. However, EIOPA has once again started to interfere with the very foundations of the system, as if they were trying to avoid any stability. For instance, a review of the so-called Ultimate Forward Rate (UFR) is scheduled as early as mid-2017. The UFR is an element of Solvency II, designed to derive long-term interests. Its current level is set at 4.2 %. In practice, the interest rate curve is much lower. EIOPA is already calling for a reduction of the UFR level. However, such reduction would be inappropriate. Without any need, it would lead to lower own fund levels of insurers and increase risk positions. Therefore, we believe that the UFR review should only take place in a few years from now. By the way: The Solvency II interest rate curve is already much more conservative than other curves, e.g. for the assessment of pension accruals under the IFRS.
But that is not all: In the very first year of Solvency II, the EU Commission requested EIOPA to draw up a report before 2018, analysing how insurers would cope with the SCR standard formula and which problems need to be solved. In December 2016, EIOPA prepared a discussion paper of 118 pages and asked the industry for its feedback. Over the course of these months, several discussion meetings are being held. Initial recommendations will be sent to the EU Commission in October. It should be noted that the word “standard formula” is highly misleading – this calculation method is already subject to numerous instructions and countless parameters to be taken into account. While apparently no groundbreaking changes are intended here, several relevant details are up for discussion. For instance, EIOPA aims at tightening the rules for the interest rate risk, which is important for results. It goes without saying that we are very aware of the effects caused by the historically low interests. Nevertheless, the German Insurance Association is firmly opposed to allowing interest rates to continue falling unchecked, even in the negative range. For our industry, there is a factual interest rate threshold below which insurers would not continue investing, but instead hold funds in cash.
The insurance industry is in a stable position
Our industry welcomes Solvency II despite the enormous efforts necessary to implement its rules, both in the past and in the future. After all, not only supervisors, but also investors and consumers have a right to know the economic situation and existing risks of an insurance company. Without any doubt, every set of rules must be continuously adapted to enable it to cope with changed framework conditions or just to get over its growing pains. Our Association is constantly exchanging views with German insurance supervisor BaFin and EIOPA in order to adapt Solvency as good as we can. I am looking forward to seeing where our discussions will lead us in these months to come.
But I am also saying: Keep it simple! It has taken over 10 years to develop Solvency II. Its rules should not be turned upside down, let alone tightened, after only a few months of application. What we should focus on now is continuity and, above all, simplification.
Jörg von Fürstenwerth
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