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EIOPA recommends "evolution rather than revolution" of Solvency II

Solvency II, the EU insurance regulatory framework, requires "evolution rather than revolution" when it is formally reviewed next year, the European Insurance and Occupational Authority (EIOPA) has said.

EIOPA, the EU's insurance regulator, has published a consultation paper seeking input from stakeholders on specific points in relation to the Solvency II 2020 review (878-page / 14.7MB PDF). The consultation paper relates to the call for advice received from the European Commission by EIOPA (10-page / 468KB PDF) earlier this year. The Solvency II directive provides that certain areas of the regime must be reviewed by the European Commission in 2020. However, the review will cover broader points than those specified for review in 2020 by the Solvency II directive.

Insurance law expert Naoise Harnett of Pinsent Masons, the law firm behind Out-Law, said that the consultation paper was "of major relevance" to insurers and reinsurers.

Insurance and reinsurance undertakings should review the consultation paper despite its length, and should note the proposed advice to determine how it could impact their groups in the future.

"The EIOPA consultation paper contains specific questions on a number of points which stakeholders are asked to give views on," he said. "However, the consultation paper is of major relevance to insurance and reinsurance undertakings as it sets out for the first time EIOPA's position on the 19 topics covered in the European Commission's Call for Advice of February this year, other than insurance guarantee schemes, through proposed, albeit not final, advice."

"Insurance and reinsurance undertakings should review the consultation paper despite its length, and should note the proposed advice to determine how it could impact their groups in the future," he said.

The Solvency II framework came into force across the EU on 1 January 2016, and is "overall working well", according to EIOPA. The "maximum harmonising" rules set out broad risk management requirements for European insurers and reinsurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities.

The changes to the Solvency II directive proposed by EIOPA which are detailed in the consultation paper have arisen out of a combination of supervisory experience, for example in relation to cross-border business, and the wider economic context. EIOPA is aiming for a "balanced" cumulative impact of its proposals on firms.

The European Commission had sought EIOPA's input on 19 separate aspects of the regime, which EIOPA has divided into three separate parts in the consultation paper. The first of these, long-term guarantee measures, was always due to be reviewed in 2020. EIOPA is consulting on a number of potential revisions as part of its advice, including to extrapolation of the risk-free interest rate and the volatility adjustment that firms can opt to apply to the risk-free interest rate when calculating their long-term liabilities.

The second and third parts of the consultation paper consider the potential introduction of new regulatory tools, and potential revisions to the existing framework. New tools proposed include harmonising national insurance guarantee schemes (on which EIOPA has already consulted); as well as macro-prudential tools, and a harmonised recovery and resolution framework for insurance. Revisions could potentially be made to provisions on freedom of services and establishment; reporting and disclosure; and the calculation of the solvency capital requirement.

EIOPA is seeking views from stakeholders on the points raised by stakeholders by 15 January 2020 and will use the consultation feedback, together with data it intends to collect on the quantitative combined impact of its proposals, to finalise its advice. It intends to issue a final opinion in June 2020.

Among the proposals detailed in the consultation paper which would be of particular interest to insurers and reinsurers are those on proportionality and nature, scale and complexity; calculation of the risk-free interest rate; contract boundaries; recognition of non-proportional reinsurance and finite reinsurance in the SCR standard formula; simplification of the SCR standard formula; Pillar II proportionality proposals around key functions and ORSA; recovery and resolution planning obligations; clarification of definitions related to the scope of group supervision and proposed powers of national supervisory authorities to require groups to structure supervised entities in a manner that facilitates supervisability, Naoise Harnett said.

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