EC must fix flaws in SII to unleash capacity for equity investments, bodies argue

Written by Adam Cadle

17/06/2021

Insurance Europe and Invest Europe have published a joint position paper that calls on the European Commission to make improvements to Solvency II (SII) to remove unnecessary barriers that undermine insurers’ ability to invest in long-term equities.

"While SII in general works well, it has also created unnecessary costs and barriers, in particular in relation to insurers’ ability to offer long-term products and to invest in long-term assets that can help drive the EU’s goals in terms of economic recovery, sustainable growth and the climate transition," Insurance Europe stated.

"This includes a detrimental impact on all types of investments in equities, including private equity and venture capital. For these reasons, it is important that the review of SII brings about much needed improvements to enable insurers, who are key institutional investors, to make long-term investments in the European economy and to contribute fully to the EU’s objectives set out in the Green Deal and the Capital Markets Union.

To achieve this, both bodies said the review of SII must achieve three things:

- Free-up insurers’ risk-taking capacity via appropriate reductions in the risk margin and improvements to the volatility adjustment and the matching adjustment;
- Avoid unnecessary and excessive increases in capital requirements (eg avoid unnecessary increases in liabilities due to changes to risk-free rate curve extrapolation);
- Improve the treatment of equities in SII.

The joint position focuses on how the treatment of equities under Solvency II can be improved by changing the criteria for the long-term equity (LTE) sub-module so that it works in practice.

"The proposed changes would not alter the intended scope of the LTE category, would remain risk-based and would maintain the necessary level of customer protection," Insurance Europe added.

"However, they would also account better for the way insurers prudently arrange and manage their long-term portfolios. Introducing these improvements to the LTE module, along with the other improvements to Solvency II noted earlier, would increase insurers’ capacity and appetite to increase their investments in all types of equity including private equity, venture capital and infrastructure."

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