On Wednesday, the European Union proposed to change the capital rules of the bloc for insurers to release 120 billion euro ($141 billion) to repair an economy damaged by COVID. This will allow for climate goals and help policyholder protection not be compromised.
Britain, the largest commercial insurance market in the world, left the EU last December to focus on its capital rules, Solvency II. It will examine how Brussels changes could impact London’s competitiveness.
The EU proposed a framework to allow for the quick and orderly closing of insurance companies in financial trouble. This is similar to a similar move made with banks after the global financial crisis, which led to taxpayer bailouts.
Mairead McGuinness, EU financial services commissioner, stated in a statement that “Today’s proposition will help the insurance industry step up and play their full part in the EU economics.”
“We enable investment in recovery and beyond.”
In 2016, the Solvency II capital rules were implemented for the sector of 10.4 trillion euros. They are used by insurance companies like Allianz and Generali.
They were due for a routine review, but the urgent need to rebuild an economy that was affected by the pandemic as well as invest in green infrastructure to reach net zero carbon targets gave rise to urgency.
It was also necessary to address the persistence of low interest rates that were undermining the business models insurance companies. Solvency II rules needed to be better tailored to smaller, more risky insurers. Some are now expected to disappear entirely.
Brussels suggested easing the volatility adjustment’s impact, which reduces the effect of short-term market movements on insurer solvency.
It wants to make it easier to get preferential capital treatment of around 10.5 billion euro for insurance companies investing in long-term assets such as infrastructure and greening the economy.
This will also reduce the risk margin, or the money required to transfer the business into another company in a crisis.
The EU’s executive European Commission stated that the goal was to have a balanced review, and to prevent a worsening of the solvency status at EU level for insurers.
The commission stated that the rule changes would allow for 90 billion euros to be released in the short-term and 30 billion euros long-term. They need approval from the EU states and the European Parliament.
It stated that the EU insurance watchdog EIOPA will conduct centralised stress tests in climate for the sector.
(Adapted from InsuranceJournal.com)