As of: 09/22/2021 4:19 p.m.
Many life insurers have come under pressure because of the central banks’ zero interest rate policy. The EU Commission is now calling for companies to better arm themselves against possible risks.
If the EU Commission has its way, insurance companies will in future have to back risky investments with more equity. This is especially true for life insurances with mostly long-term guarantees. The EU Commission has proposed a revision of the “Solvency II” capital and supervisory regulations. The current capital adequacy regulations have only been in effect since 2016. However, since then the central banks in the USA and the euro zone have lowered their key interest rates to zero, which is particularly problematic for life insurers. They had to keep reducing the guaranteed interest rate for their customers.
Since the situation on the financial markets has changed due to the low interest rates, higher risks could arise for insurers, the EU Commission justifies its request. She wants to ensure that insurers can actually keep promises to their customers.
Risks from climate change
The proposed directive also provides for the introduction of more flexible capital adequacy rules, from which lower-risk investments could benefit. In addition, a higher number of small insurers are to be completely exempted from the “Solvency II” directive. In addition, the risks should be calculated differently than before. This could free up around 90 billion euros in capital in the short term, said Economic Commissioner Valdis Dombrovskis. “The idea is to free up capital for insurers and allow them to increase their contribution as private investors to Europe’s recovery,” said Dombrovskis.
The Commission also intends to highlight climate concerns in insurance through the proposal. In future, insurers should consider risks from climate change in their risk analyzes. In addition, the European Insurance Supervisory Authority (Eiopa) is to examine by 2023 whether advantages for insurers with climate and environmentally friendly systems would be justified.
Negotiations with EU states and parliament
It is unclear whether and when the Commission’s proposals will be implemented. The Brussels authority is responsible for legislative proposals in the European Union. These are then negotiated with the European Parliament and the Council of Member States and finally approved by them. The introduction of Solvency II has already been postponed by years, from 2012 to 2016. However, the guideline was passed in 2009. The legislator was concerned with better identifying the risks of insurers in order to be able to counteract them in a more targeted manner.
For customers, risk-oriented endowment with equity capital is a benefit because it makes insurers more crisis-proof. According to experts, life insurers came through the financial crisis well. But long-term guarantees, increasing life expectancy and low interest rates on the capital market are considered a “toxic mixture” in the industry.
Many questions still unanswered
The German insurers’ association GDV commented that the proposal still left many questions unanswered, in particular the precise calculation of the future yield curve and the resulting capital requirements. “The precise design of these capital requirements is crucial for long-term products such as life insurance,” said GDV boss Jörg Asmussen. At the same time, Asmussen welcomed the relief for small insurers. However, he refused preferential treatment for green investments, as these are not always risk-free. The MEP Markus Ferber from the CSU also urged caution when calculating capital requirements. “We have to be careful that we do not turn off the money in the insurance industry by too strict capital requirements,” said Ferber.
For MEP Sven Giegold (Greens), however, the proposal did not go far enough. “The European insurance rules remain full of holes like Swiss cheese,” he said. He criticized the capital relief of 90 billion euros as a gift to the industry.