FFA labels EIOPA’s SII proposals ‘disputable’

Written by Adam Cadle

28/07/2021

The French Insurance Federation (FFA) believes that many proposals from EIOPA concerning the ongoing Solvency II 2020 review appear disputable, not only in terms of efficacity, but also in terms of need and impact.

The FFA is convinced that the Solvency II review offers the opportunity to go further in promoting a sustainable and competitive European economy. It said strengthening insurers’ ability to contribute to sustainable economic growth for innovation and employment, in line with the European objectives of the Capital Markets Union and the economic recovery is paramount.

The Federation added that the Solvency II risk margin currently represents an excessive capital buffer for insurers, and a high sensitivity to interest rates. “By putting forward measures to reduce the burden of this additional buffer, such as the introduction of a lambda factor in the formula for calculating the risk margin in order to account for the time dependency of risks, EIOPA recognises its excessive amount. The apparoaches should be further explored in a context where life insurers are already challenged by negative interest rates.” The Federation said a reduction of the cost of capital – used to calculate this risk margin – from 6% to 3% would increase French insurers’ own funds by €6bn, resulting in an increase of insurers’ risk-taking capacity, without jeopardising consumer protection.

The FFA also said that changing the current methodology and parameters for extrapolating the risk-free rate curve, as proposed by EIOPA, would have significant consequences and would particularly impact capital charges for long-term products. “Given the significant impacts and the lack of substantial economic justification, FFA recommends not to change the current methodology and parameters for extrapolating the risk-free rate curve.”

The FFA acknowledged the need to take into account the context of negative interest rates in the Solvency II framework. However, it said in the current context of economic recovery the impact on capital charges of such a measure must be offset to avoid undermining insurers’ capacity to invest in the real economy and to offer long-term products to consumers.

Finally, the FFA said it supports a “targeted review” of Solvency II, based on a holistic and long-term perspective, to allow insurers to fully contribute to the European challenges and to strengthen the EU’s competitiveness at a global level.

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