Investments, Climate, Stability: Goals of European Commission’s Solvency II proposal

Mairead McGuinness, 22.09.2021, Brussels [EC Audiovisual Service - Lukasz Kobus]

With a proposal to reform the Solvency II directive, the European Commission aims to make the insurance industry an ally in achieving the Commission’s political priorities. First reactions, however, regret a lack of ambition in the document.

On Wednesday, the EU Commission presented a package of reforms for the European insurance industry. It proposed both a reform to the Solvency II Directive and a new Insurance Recovery and Resolution Directive.

Solvency II is the EU’s directive to harmonise insurance regulations across the bloc. By determining how much capital insurance companies need to hold, the directive aims to reduce the risk of insolvency.

According to the Commission, the reformed Solvency II Directive aims to strengthen European insurers’ contribution to the recovery financing, progressing on the Capital Markets Union and the channelling of funds towards the European Green Deal. At the same time, the Commission wants to increase the stability of the insurance industry.

In the short term, the Commission predicted that up to an estimated €90 billion in capital could be released as investments into the EU economy due to the changes to the directive and the delegated acts that will follow.

The Commission believes these investments should support Europe’s recovery from the COVID-induced crisis. Still, the proposal has yet to be debated in the Council and the Parliament, which could take months or even years.

Among other measures, the Commission plans to simplify the conditions under which equity investments can be considered “long-term” and adapt the risk margins calculation to prefer long-term investments.

By easing capital requirements, the Commission hopes the insurance industry will invest more in EU companies. This would help achieve the capital markets union’s aim to reduce the reliance of EU companies on bank loans when it comes to financing options.

“We’re fostering the participation of insurance companies in the EU’s capital markets, providing the long-term investment that is so vital for a sustainable future”, said Mairead McGuinness, the commissioner for financial stability and the capital markets union.

The insurance industry had mixed feelings about the proposal. On the one hand, Deputy Director-General of Insurance Europe, Olav Jones, welcomed the step towards less strict capital requirements for insurers.

On the other hand, he insisted that only permanently reduced capital requirements would increase investments in EU companies, support for the European Green Deal, and the capital markets union.

“A significant and permanent capital reduction would allow our industry to regain international competitiveness,” he added.

Insurers’ management of climate risks

The Commission also said the reviewed directive would strengthen (re)insurers’ management of climate risks by introducing a requirement for a long-term climate change scenario analysis. This analysis will consider climate change-related risks that may not always be captured when calculating capital requirements.

Finance Watch, an NGO focusing on financial regulation, criticised the Commission’s proposal for not delivering on its obligation to combat climate change. According to the NGO, integrating “scenario analyses” in insurers’ internal risk management system would not bring about any real change, given the radical uncertainty of climate events.

Instead, Finance Watch argued that the capital requirements of insurance companies be changed to properly reflect the risk of fossil fuel assets becoming stranded assets.

“The lack of action to address sustainability risk is puzzling […], as it is one of the largest risks the sector faces today”, Finance Watch’s Thierry Philipponnat pointed out.

The Commission also proposed a new Insurance Recovery and Resolution Directive to tackle the systemic risk insurance companies pose.

By introducing a new resolution process, the Commission aims to protect better policyholders, the real economy, and the financial system. Through the establishment of resolution colleges, supervisors and resolution authorities should tackle problems arising within cross-border (re)insurance groups.

Finance Watch applauded the proposal, calling it “a most welcome move”. The NGO also pointed out that implementing recovery and resolution framework was “essential but extremely difficult, if not impossible in many cases.”

The EU Council and Parliament will now take up the proposed directives for discussion.

[Edited by Alice Taylor]

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