AM Best says Solvency II changes ‘more generous’ to insurers than most expected

AM Best has said the EC’s proposed Solvency II rule changes offer a bigger reduction in insurance capital requirements than most commentators had expected and go further than plans initially put forward by Eiopa last year. But it added that questions marks remain over the extent to which the measures will see insurers contribute more to green investment, as desired by the EC. The EC proposed changes to Solvency II last week. It claims they will better protect insurance buyers while freeing up €90bn of insurance capital in the short term to boost investments and help the Covid-19 recovery. The reform would see an overall reduction in insurers’ capital requirements, while introducing more proportionate rules. “The aim of today’s review is to strengthen European insurers’ contribution to the financing of the recovery, progressing on the Capital Markets Union and the channelling of funds towards the European Green Deal. In the short term, capital of up to an estimated €90bn could be released in the EU. This significant release of capital will help (re)insurers ramp up their contribution as private investors to Europe’s recovery from Covid-19,” said the EC. AM Best said today that the EC’s proposal offers insurers a more generous capital reduction that many expected and the European regulator Eiopa suggested back in December. The ratings agency said the review’s increased generosity principally arises from the proposed reduction in cost of capital within the risk margin calculation, from 6% to 5%. However, the document is not all good news for (re)insurers. AM Best explained that it also outlines a reduction in discount rates over the longer term. But the ratings agency noted that the reduction in risk margin and other favourable changes will be implemented well ahead of discount rate increases taking full effect. The discount rate will be phased in by 2031. “The proposed changes are, overall, somewhat more favourable for insurers’ stated regulatory solvency than the advice proffered by the European Insurance and Occupational Pensions Authority back in December 2020, suggesting that the Commission took note of responses to the consultation exercises with (re)insurance companies that have been part of the review programme,” said AM Best. But despite this assertion that the EC has listened to the European insurance industry and reduced its capital requirements by more than expected, Insurance Europe, which represents Europe’s insurers, said the proposals don’t go far enough. It said only “significant and permanent reduction of capital” would allow insurers to increase their contribution to financing the recovery and supporting the EU’s Green Deal and Capital Markets Union. “This is because insurers must take a long-term view in their strategy and investment decisions. In addition, a significant and permanent capital reduction would allow our industry to regain international competitiveness. This capital reduction can be achieved while maintaining very high levels of protection for European policyholders,” said Olav Jones, deputy director general of Insurance Europe. He added that steps to boost proportionality within Solvency II seem positive. But Mr Jones said there are concerns that the EC’s proposals for new reporting and group requirements “include elements that would unnecessarily increase costs and complexity”. AM Best said there is doubt over whether the EC’s proposals to free up insurer capital will lead to an increase in green or other economic investment on a similar scale. “Insurers’ activities are multifaceted, encompassing a wide range of corporate actions. Evidence of investment funds flowing into particular assets would only be observable in the long term, would be difficult to track and would be harder still to attribute to policy measures,” it said. As debate over proposed Solvency II changes rumble on, the European Parliament and European Council will now negotiate the final legislative texts on the basis of the Commission’s proposals.

AM Best says Solvency II changes ‘more generous’ to insurers than most expected

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