European framework
Content
Article from BaFin's 2017 annual report
Solvency II Review
Solvency II1 only came into force at the start of 2016 and yet the framework is already being reviewed (see info box "Insurance Supervision annual conference"). "The fact that we are re-examining the framework critically at such an early stage is envisaged in the Directive, and it also makes sense", says Dr Frank Grund, Chief Executive Director of Insurance and Pension Funds Supervision. Initial experiences had now been gathered and the general environment had changed.
The market value-based approach is not negotiable, according to Grund. "But we want to adjust and improve it", he adds. One example is the standard formula.2
Review of the standard formula
The European Commission asked the European Insurance and Occupational Pensions Authority (EIOPA) to examine various elements of the Delegated Regulation3, which contains the implementing provisions for Solvency II, by February 2018 in the context of the Solvency II Review. The objective was to simplify the standard formula for the calculation of the solvency capital requirement (SCR) under Solvency II and to create a supervisory regime with appropriate proportionality and technical consistency.
EIOPA submitted the first set of technical advice for the revision of the Delegated Regulation to the European Commission in October 2017. This was followed in November and December by the public consultation exercise for the second set, which was finally published by EIOPA on 28 February 2018. The subject matter for the second set of technical advice consisted of many SCR topics that are significant for the German market and which BaFin negotiated vigorously at European level.
Interest rate risk
A new methodology is proposed for interest rate risk, which is intended in particular to reflect the low interest rate environment appropriately with negative interest.
Deferred taxes and risk margin
EIOPA developed a number of guidelines for dealing with the loss-absorbing effects of deferred taxes, which are intended to be applied in particular to the impairment testing of deferred tax assets. For the risk margin, the review was limited to the cost-of-capital rate. The results confirmed the figure of six percent.
Simplified standard formula
The proposals to simplify the standard formula related in particular to counterparty default risk, catastrophe risk and the look-through approach.
Removal of technical inconsistencies
Proposals to remove technical inconsistencies were put forward in the non-life premium and reserve risk module, among other areas. For non-life premium and reserve risk, an adjustment of the risk factors was suggested for some business areas, for example legal expenses insurance. In addition, with respect to the volume measure for premium risk, it was suggested that the premium gap existing in the volume measure for multi-year contracts be filled.
BaFin supports revision
BaFin welcomes the revision of the standard formula. It encouraged German (re)insurers subject to the provisions of Solvency II to take part in the consultations and also participate in the data queries. It was important for the first review of the standard formula to draw attention once again to the particular features of the German insurance business so that – in accordance with their importance for the German market – they are taken into account.
EIOPA report on long-term guarantees measures
On 21 December 2017, EIOPA for the second time published a report on long-term guarantees (LTG) measures and measures on equity risk, which were anchored in Solvency II with the Omnibus II Directive.4 EIOPA has established a project specifically for the review of the LTG measures in which representatives of BaFin are participating.
The report describes how the insurers are applying the measures referred to. In addition to the effects of the measures on the solvency situation of the insurance undertakings, it also deals with the impact on the protection of the beneficiaries' interests under the insurance contracts, the availability of insurance products, the investment behaviour of the insurers and the stability of the financial markets.
Furthermore, the report contains data on the extent to which the individual measures are being used in the different markets. An analysis of the information on the application of the LTG and equity risk measures, published by the insurers in their Solvency and Financial Condition Reports (SFCR), also forms part of the report.
German insurers
For the German market, the transitional measures for the valuation of the technical provisions, the volatility adjustment and the extrapolation of the yield curve represent the three most important LTG measures. In 2017, 82 German insurers applied the volatility adjustment in accordance with section 82 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz). 63 undertakings used the transitional measures for technical provisions pursuant to section 352 of the Insurance Supervision Act.
There will be further LTG annual reports in the next few years. In 2020, EIOPA will draw up recommendations on the LTG measures for the Commission as the result of the work of the project group.
Insurance Supervision annual conference
Around 250 representatives of insurance undertakings and industry associations came to the 7th Insurance Supervision annual conference in Bonn on 11 October 2017. The central themes of the event were Solvency II, digitalisation in the insurance sector and the ongoing development of regulation. In his opening speech, Chief Executive Director Dr Frank Grund gave a report on current issues and the economic situation in the industry. He warned insurers with business operations in the United Kingdom to prepare for the possibility of a hard Brexit. With respect to external run-offs, Grund stressed that BaFin had not received or been notified of any new applications from life insurers. But "in future cases as well, we will protect the interests of the insured – and not just in financial respects", he confirmed. Guest speaker Dr Nathalie Berger, Head of Unit at the EU Commission, reported on the ongoing development of insurance regulation from a European perspective.
Following the presentations, industry representatives and supervisors discussed the areas of conflict under Solvency II in practice as well as the risks and opportunities presented by digitalisation.
Pan-European Personal Pension Product
As part of the planned Capital Markets Union, the EU Commission intends to establish a simple, efficient and competitive EU product for personal pension provision. The Commission presented the first draft of a regulation for this Pan-European Personal Pension Product (PEPP) on 29 June 2017.5 The draft was based, among other things, on an EIOPA report from 20166 as well as the consultation and public hearing of stakeholders on this subject.
The Commission's objective with its proposal is to enable providers of pension products to offer a simple and innovative personal pension product across Europe. The new product is intended to open up a wider range of retirement provision options for savers. PEPPs should have standardised features across the EU and, based on the Commission's proposal, be offered by a variety of businesses: insurers, banks, occupational pension funds, investment firms and asset management companies. PEPPs are intended to supplement the existing statutory, occupational and national personal pension schemes, but should neither replace nor harmonise private provision.
Tax treatment
The Commission is recommending the member states grant the same tax treatment to PEPPs as to similar national products. The new product category is also intended to contribute to enabling greater flows of savings into long-term investments in the EU, which would also ultimately assist the project of a Capital Markets Union.7
The precise details of the PEPPs are currently being negotiated in the relevant working group of the European Council, in which the Federal Ministry of Finance is represented. BaFin will provide support and advice to the Ministry if required.
Footnote:
- 1 Directive 2009/138/EC, OJ EU L 335/1.
- 2 See chapter I 6.
- 3 Delegated Regulation (EU) 2015/35, OJ EU L 12/1.
- 4 https://eiopa.europa.eu/Publications/Reports/2017-12-20%20LTG%20Report%202017.pdf.
- 5 See http://europa.eu/rapid/press-release_MEMO-17-1798_en.htm and 2016 Annual Report, page 138.
- 6 "Final advice from EIOPA on the development of an EU single market for personal pension products".
- 7 See http://europa.eu/rapid/press-release_IP-17-1800_en.htm.
