Solvency II has made its fair share of headlines in recent months. New research revealed last week that almost half of European insurers think the regulation has restricted their ability to make long-term investments, with many worried the regulation has negatively impacted their products.
The survey, led by Insurance Europe, polled 87 insurers across 17 EU markets and found that 48% have invested less in equities, long-term bonds and private placements because of Solvency II.
Despite that, three quarters of the insurers said they had seen a positive effect from the EU’s 2016 Solvency II regulation on their risk management and governance practices and on their management of assets and liabilities.
Andreas Brandstetter, president of Insurance Europe, called on the European Commission’s 2020 review of Solvency II to address the regulation’s “overly conservative nature.”
He said the industry supports Solvency II, but called for further issues to be addressed in the current 2018 review, including reducing the cost of capital in the risk margin – which he said currently removes €200 billion (£176 billion) of capital from balance sheets that could instead be put to productive use.
“It treats insurers as if they were short-term traders when they are, in fact, mostly long-term investors,” Brandstetter said.
However, Prudential Regulation Authority’s chief executive Sam Woods has said that influencing change on the risk margin issue is not likely yet – citing Brexit as a factor.
“In the context of the ongoing uncertainty about our future relationship with the EU in relation to financial services we do not yet see a durable way to implement a change with sufficient certainty for firms to be able to rely on it for pricing, capital planning, and use of reinsurance,” Woods said in a letter to Treasury Committee chair Nicky Morgan MP, published by The Bank of England (BoE).
David Rule, executive director, insurance supervision at BoE, suggested that change could come at a later date while speaking at an event in London in June.
Citing uncertainty around the UK’s future relationship with the European Union, he said:
“We hope that once that is more clear, we will be able to return to the risk margin because our view remains that this is the bit of Solvency II that is most clearly badly designed, particularly from the perspective of UK annuity writers.
He added: “We would have liked to have been able to address that but have concluded that, at least for the time being, we can’t do that.”
