portfolio institutional speaks to the man responsible for Solvency II – EIOPA chairman Gabriel Bernardino – about the forthcoming regulatory changes and what they mean for investors.
“Let’s be frank: Solvency II is not perfect. There are no perfect regulatory systems; they are based on reference points.”
Gabriel Bernardino
What is the reason of the further delay of Solvency II to 2015?The main issue is to deal with long-term guarantee products. And the idea of this delay is to have an assessment of how the different tools that have been designed in order to deal with these long term guarantee products work.Measures like matching adjustment, countercyclical premiums need to be tested and they have never been tested in the past. But the exact timing for this testing is still under discussion. The Commission, the Parliament and the Council of the EU have to decide when this test will come and what the basis of this test is. After that we will make conclusions and will provide our recommendations to the EU political institutions.It is fundamental to have clarity and certainty – not only for supervisors but also for the industry. The worst situation is to have a kind of open situation without clarity and without a clear commitment to one date. That would be the worst situation.
Wasn’t the strategy to start as soon as possible and then try to improve Solvency II while it was running?This you have to ask the political institutions. Our view on Solvency II is that the system we use today is not sufficient because we need better and more information. Different types of risks are not reflected in the capital calculations right now. Therefore we definitely need Solvency II. We need Solvency II also because Solvency II is much more than capital. Solvency II is a new, completely different way of looking to risk management. Solvency II is a huge step in terms of transparency, too. All these elements are very much relevant for the insurance business for protection of the policy holders.A second thing is the political timing. Especially for these long term products in the life insurance sector there are some challenges in terms of applying an economic evaluation because of the volatility right now. EIOPA’s message: we need Solvency II to be implemented. But we also need to bring clarity and certainty to the process.
Insurance companies would agree that clarity to the process is needed. But what they need much more are other stress factors for the asset classes.Have a look at the development of Solvency II, which is a risk-based system: the basis is to look at the business risks of insurance companies and one of the most important risks is related to their investments. Then there needs to be a decision on the level of prudence that you want to have in the system. And that’s of course a political decision. The political institutions in Europe are quite clear in the Directive of 2009 saying “we want companies to have capital requirements in order to reduce the number of failures to probability of 99.5 %”. Again it was not the supervisors decision, it was a political decision for this level of prudence. Then the supervisors made an analysis of risks based on the available data Taking for example the volatility of equity markets in calculation we got 39%.But what you have to understand by this capital calculation: it is not only about the risk charges on each category of investments. You have to consider the correlations, too. Taking into account the correlations, the equity risk can come down to around 15%.
But isn´t there the threat that everyone is discovering the same Solvency-II-efficient asset allocation and so systemic risk emerges?No. In countries which have already implemented a risk-based regulation there is no herd behaviour in terms of asset allocation. There will be some optimal asset allocations. But risk appetites will continue to be different. There will be companies which have for example good management skills on real estate and so will have here a higher allocation.The investment policies are not only driven by regulatory requirements. On the contrary, we are going in comparison to Solvency I in a completely different direction. The portfolios will evolve much more because of the reality of the economy or because of the rates of guarantee contracts.
Comments