A risk-based regime for Europe

Since 1 January 2016, Europe’s insurers have been governed by a set of rules called Solvency II. The rules aim to ensure that policyholders throughout the European Union enjoy the same level of protection, no matter where they buy insurance. 

Solvency II is the most sophisticated in the world. Europe’s insurers truly appreciate its high standards of governance, risk management, reporting, and the consumer protection it provides. However, there is a limited, yet significant, number of problems that need to be addressed.

Fortunately, when Solvency II was set up, it was recognised that any new regulation that is so big and ambitious would need to be adjusted and improved to ensure it worked as planned and to avoid unintended consequences. A first limited review took place in 2018 and another more comprehensive review is taking place in 2020.

When discussing this review, it is worth remembering that Solvency II was not introduced because of a solvency problem in the industry. Rather, its aims were to:

• Harmonise diverging national insurance regulations.
• Ensure a consistent level of customer protection across the EU.
• Introduce a risk-based approach

The promise was that insurers’ capital requirements would be more in line with the risks they face. As such, the expectation was that some companies would need to hold more capital, some less, depending on their risk-taking.

Recent years of application have shown that Solvency II has achieved its overall objectives and in many respects is working reasonably well, but requires a limited set of focused changes. Therefore, the review should focus on the following areas where there are known and important problems to address: the treatment of long-term business, proportionality and reporting.

Long-term business

Fixing issues with how Solvency II treats insurers’ long-term business is vital. This means addressing the problems of measurement and capital treatment for long-term savings and guarantees, as these are the products needed to close Europe’s pensions gap and support Europe’s long-term sustainable investment needs.

Proportionality

Making proportionality a practical reality — rather than a theoretical principle — is also key. Today, very little proportionality is applied in practice. This must be addressed so that the framework really works for all entities to reduce costs and preserve a diversified and competitive European market, for the benefit of consumers.

Reducing unnecessary reporting burden

Meaningful reductions must also be made to the regulatory reporting burden to streamline and simplify reporting requirements. Reporting requirements are not only overly burdensome, but significant elements of them are simply not used. We must therefore identify what information is actually useful for supervisors and consumers.