[et_pb_section fb_built=”1″ _builder_version=”4.20.4″ _module_preset=”default” background_color=”#0a203b” background_enable_image=”off” global_colors_info=”{}”][et_pb_row _builder_version=”4.20.4″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” custom_width_px=”710px” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ background_position=”top_left” custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Title” _builder_version=”4.22.1″ text_font=”|900|||||||” header_font=”||||||||” header_2_font=”Montserrat|700||on|||||” header_2_text_color=”rgba(199,156,62,0.59)” header_2_font_size=”23px” header_2_letter_spacing=”4px” header_2_line_height=”1.2em” header_6_font=”Lato|700|||||||” header_6_text_color=”#737a7a” header_6_font_size=”18px” header_6_letter_spacing=”1px” header_6_line_height=”1.8em” max_width=”600px” module_alignment=”left” custom_margin=”30px||30px||true|false” custom_padding=”|||” custom_padding_tablet=”|0vw||0vw||true” custom_padding_phone=”|||||false” custom_padding_last_edited=”off|desktop” animation_style=”slide” animation_direction=”bottom” animation_intensity_slide=”5%” locked=”off” global_colors_info=”{}”]<\/p>\n
[\/et_pb_text][et_pb_text _builder_version=”4.22.1″ text_font=”Lato||||||||” text_font_size=”18px” text_line_height=”1.8em” header_font=”Montserrat|700|||||||” header_font_size=”38px” header_line_height=”1.3em” header_2_font=”||||||||” max_width=”600px” module_alignment=”left” custom_margin=”30px||30px||true|false” custom_margin_last_edited=”off|desktop” custom_padding=”|||” custom_padding_tablet=”|0vw||0vw||true” custom_padding_phone=”|||||false” custom_padding_last_edited=”off|desktop” animation_style=”slide” animation_direction=”bottom” animation_intensity_slide=”5%” header_font_size_tablet=”36px” header_font_size_phone=”” header_font_size_last_edited=”on|phone” locked=”off” global_colors_info=”{}”]<\/p>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ admin_label=”Split Section” _builder_version=”4.22.2″ background_color=”rgba(0,0,0,0.03)” custom_padding=”0px||0px|” animation_style=”fold” animation_direction=”bottom” animation_intensity_fold=”4%” global_colors_info=”{}”][et_pb_row use_custom_gutter=”on” gutter_width=”1″ make_equal=”on” module_class=” et_pb_row_fullwidth” _builder_version=”4.22.2″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” width_tablet=”100%” width_phone=”100%” width_last_edited=”on|desktop” max_width=”100%” max_width_tablet=”100%” max_width_phone=”100%” max_width_last_edited=”on|desktop” custom_margin=”0px||0px|” custom_padding=”0px||0px|” make_fullwidth=”on” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.22.2″ background_enable_image=”off” parallax=”on” custom_padding=”||||false|false” custom_padding_tablet=”||||false|false” custom_padding_phone=”||||false|false” custom_padding_last_edited=”on|phone” background_last_edited=”on|phone” parallax_phone=”on” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_code _builder_version=”4.22.2″ _module_preset=”default” custom_margin=”15px||15px|25px|false|false” global_colors_info=”{}”]Home<\/a><\/span><\/span>[\/et_pb_code][et_pb_cta button_url=”#” admin_label=”Feature 01″ _builder_version=”4.22.2″ header_font=”Montserrat|700|||||||” header_text_color=”#1f1f1f” header_font_size=”32px” header_line_height=”1.4em” body_font=”Lato||||||||” body_font_size=”18px” body_line_height=”1.8em” use_background_color=”off” custom_button=”on” button_text_size=”15px” button_text_color=”#ffffff” button_bg_color=”#d6a942″ button_border_width=”14px” button_border_color=”#d6a942″ button_border_radius=”25px” button_letter_spacing=”2″ button_font=”Lato|900||on|||||” button_icon=”$||divi||400″ text_orientation=”left” background_layout=”light” module_alignment=”left” custom_margin=”|||25px|false|false” custom_margin_tablet=”|273px||||” custom_margin_phone=”18vw||18vw||true|false” custom_margin_last_edited=”on|phone” custom_padding=”|25px|||false|false” animation_style=”fold” animation_direction=”bottom” animation_intensity_fold=”15%” button_text_color_hover=”#6eba01″ button_border_color_hover=”#6eba01″ button_border_radius_hover=”0″ button_letter_spacing_hover=”2″ button_bg_color_hover=”rgba(0,0,0,0)” saved_tabs=”all” locked=”off” global_colors_info=”{}” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”on|hover” button_text_color__hover=”#FFFFFF” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”on|desktop” button_border_color__hover=”#d6a942″ button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”on|hover” button_border_radius__hover=”25px” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”on” button_letter_spacing__hover=”2″ button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”on|hover” button_bg_color__hover=”#d6a942″ button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off” button_bg_enable_color__hover=”on”]<\/p>\n On 22 September 2021, the European Commission adopted a comprehensive \u2018review package\u2019 of the Solvency II rules (Directive 2009\/138\/EC) which has been applicable for insures in the European Union since January 1, 2016. The review has resulted in two proposals of the European Commission to be discussed by the European Parliament and the Council and finally to be converted into requirements monitored by the supervisors of the respective member states.<\/p>\n The European Commission has a legal mandate to conduct a comprehensive review of pivotal components of the Solvency II Directive, in particular its risk-based capital requirements and rules on valuation of long-term liabilities, and to draw conclusions from the first 5 years of experience with the framework.<\/p>\n Recent review underlined the absence of specific EU-level provisions to address the build-up of systemic risks, to ensure preparedness for crises or to resolve insurers, where necessary. Moreover, the framework needs to be consistent with the EU\u2019s political priorities. In particular, the insurance sector should play a role in financing the post COVID-19 economic recovery, in completing the Capital Markets Union (CMU) and in achieving the targets of the European Green Deal.<\/p>\n The main trade-off in addressing these problems relates to the overall quantitative impact of the review. A significant increase in capital requirements would hinder insurers\u2019 contribution to the green and sustainable recovery. At the same time, a significant decrease would jeopardise policyholder protection and financial stability.<\/p>\n The review has resulted in two proposals of the European Commission to be discussed by the European Parliament and the Council:<\/p>\n This article continues with the proposal for the amendment of Solvency II, and more specifically, the potential impact on the insurer\u2019s operations.<\/p>\n [\/et_pb_cta][et_pb_cta button_url=”#” admin_label=”Feature 01″ _builder_version=”4.22.2″ header_font=”Montserrat|700|||||||” header_text_color=”#1f1f1f” header_font_size=”32px” header_line_height=”1.4em” body_font=”Lato||||||||” body_font_size=”18px” body_line_height=”1.8em” use_background_color=”off” custom_button=”on” button_text_size=”15px” button_text_color=”#ffffff” button_bg_color=”#d6a942″ button_border_width=”14px” button_border_color=”#d6a942″ button_border_radius=”25px” button_letter_spacing=”2″ button_font=”Lato|900||on|||||” button_icon=”$||divi||400″ text_orientation=”left” background_layout=”light” module_alignment=”left” custom_margin=”|||25px|false|false” custom_padding=”|25px|||false|false” animation_style=”fold” animation_direction=”bottom” animation_intensity_fold=”15%” button_text_color_hover=”#6eba01″ button_border_color_hover=”#6eba01″ button_border_radius_hover=”0″ button_letter_spacing_hover=”2″ button_bg_color_hover=”rgba(0,0,0,0)” saved_tabs=”all” locked=”off” global_colors_info=”{}” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”on|hover” button_text_color__hover=”#FFFFFF” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”on|hover” button_border_color__hover=”#d6a942″ button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”on|desktop” button_border_radius__hover=”25px” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”on” button_letter_spacing__hover=”2″ button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”on|desktop” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off” button_bg_enable_color__hover=”on” button_bg_color__hover=”#d6a942″]<\/p>\n The evaluation has concluded that, overall, the Solvency II framework functions effectively, but that certain elements need to be improved:<\/p>\n Most of the improvements won\u2019t require significant transformation efforts.<\/p>\n We elaborate on the second improvement that has been proposed and its impact on the insurer\u2019s operating model. That part of the proposal aims to enhance risk sensitivity of long-term guarantee measures, and better mitigate undue short-term volatility of the insurers\u2019 solvency position. Solvency ratios would become more stable and reduced volatility would incentivize long-termism in underwriting and investment decisions by insurers. Therefore, the EC has proposed amendments to the extrapolation of risk-free interest rates and volatility adjustments.<\/p>\n Extrapolation of the <\/span><\/em>relevant risk-free interest rate term structure<\/em><\/p>\n Under a Solvency II balance sheet, the liabilities are valued at Market Value (i.e. the Best Estimate of the Liabilities plus risk margin). The Best Estimate of the Liabilities are calculated by discounting future cash-flows using the risk-free rate (RfR). The determination of the relevant risk-free interest rate term structure shall make use of information derived from relevant financial instruments. That determination shall consider relevant financial instruments of those maturities where the markets for those financial instruments as well as for bonds are deep, liquid and transparent. For maturities where the markets for the relevant financial instruments or for bonds are no longer deep, liquid and transparent, the relevant risk-free interest rate term structure shall be extrapolated. The extrapolated part of the relevant risk-free interest rate term structure shall be based on forward rates converging smoothly from one or a set of forward rates in relation to the longest maturities for which the relevant financial instrument and the bonds can be observed in a deep, liquid, and transparent market to an ultimate forward rate.<\/p>\n The amendments as proposed require that the extrapolation takes into account, where available, information from financial markets for maturities where the term structure is extrapolated. It requires additional data points to assess the term structure of a long term instrument, for example for a 100 years 1% Austrian government bond.<\/p>\n The resulting new extrapolation method is phased in linearly over a period running until 2032, during which insurers will have to disclose the impact of the new extrapolation method without phasing in.<\/p>\n Volatility adjustment<\/em><\/p>\n On top of the RfR, EIOPA allows under specific circumstances to add a \u201cvolatility adjustment\u201d for long-term guarantees insurance products. The volatility adjustment (\u2018VA\u2019) is a measure to ensure the appropriate treatment of insurance products with long-term guarantees under Solvency II. (Re)insurers are allowed to adjust the RfR to mitigate the effect of short-term volatility of bond spreads (the difference in the yield on two different bonds or two classes of bonds, i.e. the yield of the US Treasury towards the yield of a corporate bond of the same maturity) on their solvency position. As such the VA aims to dampen irrational market developments that would result in unjustified credit spreads. More concretely, the purpose is to moderate the effect of deteriorating bond prices because of low market liquidity or as a result of an exceptional (non-credit related) widening of bond spreads.<\/p>\n [\/et_pb_cta][et_pb_cta button_url=”#” admin_label=”Feature 01″ _builder_version=”4.22.2″ header_font=”Montserrat|700|||||||” header_text_color=”#1f1f1f” header_font_size=”32px” header_line_height=”1.4em” body_font=”Lato||||||||” body_font_size=”18px” body_line_height=”1.8em” use_background_color=”off” custom_button=”on” button_text_size=”15px” button_text_color=”#ffffff” button_bg_color=”#d6a942″ button_border_width=”14px” button_border_color=”#d6a942″ button_border_radius=”25px” button_letter_spacing=”2″ button_font=”Lato|900||on|||||” button_icon=”$||divi||400″ text_orientation=”left” background_layout=”light” module_alignment=”left” custom_margin=”|||25px|false|false” custom_margin_tablet=”|273px||||” custom_margin_phone=”18vw||18vw||true|false” custom_margin_last_edited=”on|phone” custom_padding=”|25px|||false|false” animation_style=”fold” animation_direction=”bottom” animation_intensity_fold=”15%” button_text_color_hover=”#6eba01″ button_border_color_hover=”#6eba01″ button_border_radius_hover=”0″ button_letter_spacing_hover=”2″ button_bg_color_hover=”rgba(0,0,0,0)” saved_tabs=”all” locked=”off” global_colors_info=”{}” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”on|hover” button_text_color__hover=”#FFFFFF” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”on|desktop” button_border_color__hover=”#d6a942″ button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”on|hover” button_border_radius__hover=”25px” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”on” button_letter_spacing__hover=”2″ button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”on|hover” button_bg_color__hover=”#d6a942″ button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off” button_bg_enable_color__hover=”on”]<\/p>\n For each relevant currency, the volatility adjustment to the relevant risk-free interest rate term structure shall be based on the spread between the interest rate that could be earned from assets included in a reference portfolio for that currency and the rates of the relevant basic risk-free interest rate term structure for that currency. The amount of the volatility adjustment to risk-free interest rates shall correspond to 65 % of the risk-corrected currency spread which is the difference between the spread as referred to above and the part of that spread that is related to (a realistic estimation) of the expected losses and other risks of these assets.<\/p>\n Each month, EIOPA publishes the VA, which is calculated based on a pre-defined reference investment portfolio, representing an average European insurer.<\/p>\n The following amended requirements for the application of the VA have been proposed:<\/p>\n The VA for a currency = 85% of the product of the CSSR for the currency and the RCS for the currency.<\/p>\n The macro volatility adjustment, applicable for the EURO member states, shall be calculated as follows:<\/p>\n VA for the EURO = 85% of the product of the CSSR for the EURO, the maximum of the risk adjusted spread for the respective portfolio currency or the risk adjusted spread of the EURO multiplied by factor 1.3, and the country adjustment factor for the respective country:<\/p>\n VAeuro,macro = 85% * CSSReuro * max(RCSco -1.3*RCSeuro;0)*\u03c9co<\/p>\n So, the proposal provides room for customization for the calculation of the technical provisions. But lunches are hardly for free so which offers should be made for the application of the customized volatility adjustment and the amended extrapolation method.<\/p>\n In terms of data, these amendments may impact an insurer in two different ways:<\/p>\nPERIODICAL REVIEW OF THE SOLVENCY II DIRECTIVE <\/span>[1]<\/a><\/h3>\n
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IMPROVEMENTS ON THE CURRENT SOLVENCY II DIRECTIVE<\/h3>\n
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AMENDMENTS TO THE VOLATILITY ADJUSTMENT AND THE EXTRAPOLATION OF THE RISK-FREE RATE<\/h3>\n
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IMPACT ON THE (RE)INSURERS OPERATIONS<\/h3>\n