Letter from Brussels

Although policy makers in Brussels are currently busy with high profile legislative proposals on AIFMD, the use of shell entities for tax purposes and the European Long-Term Investment Fund, ELTIF, they’re also busy with another issue that you might think had been forgotten - Solvency II. But the directive that, among other things, establishes solvency capital requirements for insures is now back in the spotlight after undergoing an extensive review in recent years. And things are moving quickly.

they’re also busy with another issue that you might think had been forgotten - Solvency II.

So, where are we? In September of last year the European Commission issued a legislative proposal based on the results of a comprehensive review of Solvency II rules. Their proposals are being discussed within the European Parliament and need their approval, along with the approval of Member States, to come into effect. As these discussions progress in the wake of the financial fallout from the Covid-19 crisis, in both the European Parliament and the Council currently operating under the French presidency, there is a sudden emphasis on how Solvency II rules are limiting the important contribution that insurance companies’ long-term investments can make to creating jobs and stimulating the European economy to support the recovery. 

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This focus on ensuring that Solvency II rules don’t limit insurers’ ability to make long-term investments is an issue we have raised. This creates an opportunity to repeat our arguments that standard model SCRs for real estate under Solvency II are not based on the best data now available and do not reflect the real volatility of real estate investment. Furthermore, the Solvency II one-year downside volatility measure is arguably inappropriate for illiquid long term assets that are often held through dips in the market and in any case generally can’t be quickly liquidated to support short-term solvency needs. 

This focus on ensuring that Solvency II rules don’t limit insurers’ ability to make long-term investments is an issue we have raised.

EIOPA data have demonstrated that real estate is the longest held asset among the different long-term asset classes, including infrastructure. We argue that the SCRs for real estate should be based on more representative data such as that used in the TLI model developed by IPD/MSCI and that a three- or five-year window of downside volatility would be more appropriate. Both improvements would significantly lower the standard model SCR for real estate without posing a risk to insurers’ financial stability and or systemic volatility, which would free-up capital for long-term investment in the real economy.

EIOPA data have demonstrated that real estate is the longest held asset among the different long-term asset classes, including infrastructure.

At the same time, across the channel, Solvency II has also become a focus of policy makers in London who, post-Brexit, are keen to rewrite key financial rules to unleash insurers’ capital to stimulate the economy, particularly in the regions to support the government’s levelling-up efforts, boost long-term investment and create jobs. We are actively engaged with UK policy makers as well. The UK Treasury is expected to announce a comprehensive package of Solvency UK reforms, together with a consultation paper in April. We’ll be sure to keep members informed on this important issue on both sides of the Channel.