EP/Council deal on rules to reduce insurance firms’ investment risks

Draft EU legislation to reduce the riskiness of insurance firms’ investments – and taxpayer exposure to them – was informally agreed by Parliament and member state negotiators on Wednesday night. The rules applied to insurers will be like those already in place for banks, but adapted to their typically longer-term investment profile, so as not to penalise them for taking a long-run view.

The “Solvency II” legislation, thirteen years in the making, will require the EU’s €8 trillion insurance industry, its largest institutional investor, to set aside enough capital to cover investment risks. It is to take effect on 1 January 2016.

The Solvency II rules were agreed as part of a broader package which fine-tunes risk management rules to make them consistent with the EU's financial supervisory system set up in 2012.

"The agreement will ensure a system which takes investment risk better into account in the future. The new rules needed to be ambitious because greater security was necessary. But we have also ensured that insurance companies will be able to continue to fulfil their role as long-term investors, even in difficult economic situations ", said Burkhard Balz (EPP, DE), the MEP who steered the package through Parliament.

The biggest hurdle

The biggest hurdle cleared on Wednesday was the size of the capital buffer that insurance companies would need to hold for investments they declared they would hold on to for a long time (so called “long-term guarantees”). The agreed rules acknowledge that insurers hold on to their investments for comparatively long periods and are therefore less affected than others by sudden and severe market shocks.

However, the rules would still require insurance companies to hold more buffer capital than they do now and to take more realistic views of their liabilities. The rules will also require insurers to take account of the effect of financial market volatility. MEPs also secured a provision on continuous monitoring and control systems to ensure that the prescribed requirements are appropriate in practice.

Empowering the EU insurance watchdog
MEPs fought hard to ensure that the newly-established European Insurance and Occupational Pensions Authority (EIOPA) has the necessary clout in the system. For example, it will be EIOPA which decides when “exceptional circumstances” (allowing a relaxation of the rules) exist and when they cease to do so. It will also have a stronger role in its relations with national authorities, something which some countries initially opposed.

MEPs also secured that EIOPA will be empowered to request more information from countries regarding how they have implemented the different parts of the legislation so as to ensure correct compliance.

The global dimension

Ensuring a workable relationship with third country systems was another point settled on Wednesday. It was agreed that the European Commission will be able to decide that a third country's system is “provisionally equivalent” to the EU’s for a period of ten years, with the possibility to renew such a decision. This will allow insurance companies with activities in ”equivalent systems” to continue to operate effectively.

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