The Solvency II directive requires a review of the long-term (LTG) measures and the measures on equity risk until end of 2020.*
The LTG measures are:
- the extrapolation of risk-free interest rates,
- the matching adjustment (MA),
- the volatility adjustment (VA),
- the extension of the recovery period in case of non-compliance with the Solvency Capital Requirement,
- the transitional measure on the risk-free interest rates (TRFR)
- the transitional measure on technical provisions (TTP).
The equity risk measures are:
- the application of a symmetric adjustment mechanism to the equity risk charge (SA),
- the duration-based equity risk sub-module.
783 insurance companies on the European Economic Area uses at least one of these measures, 74% of technical provisions: 730 (66%) use VA, 163 (25%) use TTP, 38 (15%) use MA. 46% of all life insurance undertakings in Europe use VA.
There are eight countries that do use any measure (mostly small central east countries, including Poland).
Removing MA, VA, TRFR, TTP, technical provisions at the European level would go up by €215 bn, Own funds would reduce by €164 bn, the SCR would go up by €73 bn. The average impact in terms of SCR ratio for undertakings using at least one measure at European level would be -69%: Germany (-113%), UK (-108%), Denmark (-80%), Spain (-76%), Portugal (-66%). For Italy it would be almost insignificant: -9%. 11% of undertakings using these measures would be below the SCR and 5% below the MCR.
On average, undertakings that apply the measures MA, VA, TRFR or TTP hold bonds of lower credit quality (in particular Corporate bonds and Government bonds) than undertakings that do not apply any of these measures. Also the duration is longer (in UK is more than the double).
MA is only used in Spain and UK (53% of technical provisions), the average advantage in terms of bps in UK is 110 yielding an advantage of 89% on the SCR ratio. 42% of the companies (in Spain and UK) using the MA would be below 100% without it.
In ten countries (including UK but not Italy), the approval by the authority for the application of the VA is needed. In Italy 95% of technical reserves use the VA, only 35% in UK. The advantage in terms of SCR ratio for undertakings using the VA is mostly for Denmark (80%), Germany (53%), Netherlands (49%), quite limited in Italy and UK (9 and 6%, respectively). The average at the European level is 24%. 3% of undertakings (20) at European level using the VA would be below 100%.
The size of the VA as at end of 2016 for the Euro (it applies to all Euro-countries) is 13 bps (22 in 2015). In UK it was 30 bps. In four countries (Greece, Italy, Portugal, Spain) the country spread is higher than the double of the currency spread but below 100 and therefore it doesn’t provide a contribution (country-VA).
In UK, 54% of technical provisions adopt TTP (mostly Life) with a 47% improvement on the SCR ratio, the effect for all the companies at the European level adopting the TTP is 88% with a huge advantage for French undertakings (139%), Germany (233%), Belgium (135%) and Spain (107%). 26% of undertakings (43) at European level using TTP would be below 100% (13 in Germany and UK, 10 in Portugal).
The market share in technical provisions of undertakings using TRFR is negligible. The effect of equity risk measures is negligible.
169 undertakings adopted TTP or TRFR, of these 60 were required to provide a phase in plan: retention of profits or earnings (27), raising new capital (16), reduction of risk profile (20), change of product design (10), reduction on expenses (17).
It emerges that Italian undertakings do not take advantage in a significant way of Long Term Guarantees measures. Instead there are countries (Germany, UK, Demark, Spain, Portugal, Greece, Norway, The Netherlands) where these measures help significantly to cope with regulatory constraint.
*EIOPA (2017) Report on long-term guarantees measures and measures on equity risk.