"Help us generate returns" insurers tell regulators

Channels: Regulation

Companies: EIOPA, Aviva, New Ireland Assurance

People: Justin Wray, Hugh Francis, Tony O'Riordan

While insurers and regulators agree on principle on the proposed changes to Solvency II, they agree to disagree on the implementation of those changes, the audience of Insurance Asset Risk 2020 EMEA has heard.

During a panel on the Solvency II 2020 review, participants lamented on what they perceived as flaws or weaknesses in the current European insurance regulatory framework, namely: the calibration of the risk margin, the volatility adjustment mechanism, the matching adjustment rules, the capital charges for long-term equity, and negative interest rates stress tests.

“EIOPA is always blessed with feedback,” Justin Wray, head of policy department at EIOPA said jokingly when asked if he had heard any new feedback from his fellow panelists.

Beyond the technical and technocratic considerations of the review, panellists welcomed EIOPA’s effort to frame the Solvency II review within the current economic environment of low interest rates, but lamented that they still need more flexibility to make the investments they need to yield the right returns for their policyholders.

Asked how the review might impact insurers’ investments, Hugh Francis, director of external reporting developments at Aviva, said it would ultimately depend on the outcome of the review.

“If we can address some of the procyclicality and give full confidence that we’ve got a good set of measures that address some of the issues with regards to capitalisation, you could see a greater increase in investment capability from the insurance sector,” he said. “That said, we should make sure we invest in the right thing, so ALM should theoretically drive the business not by regulation. What we need is the flexibility to invest in the things we think provide the type of returns that we need to serve our policy holder.”

A sentiment echoed by fellow panellist Tony O'Riordan, chief financial officer at New Ireland Assurance, who said the technical changes may lead to investment changes, “but the really key question for us is how to generate returns in an environment where the interest rates are where they are”.

He added: “The regulatory environment needs to facilitate the solutions to those problems which will be beneficial to customers.”

The last words (of the panel) went to the regulator, with Wray saying: “How will insurers’ investment change, you ask. This is a matter for insurers! One of the good things about Solvency II is that it doesn’t prescribe what insurers should invest in. All it requires is that the risk to different investments are recognised.”

He concluded: “I think the best contribution [regulators] can [make] is a good prudential framework and that is what we are aiming at.”

More information about the event and how to attend is available here.

Vincent Huck