Feb 092019

The 2018 Eiopa Report on Long-term Guarantees measures and measures on equity risk was released in December 2018. The analysis refers to data at 31 December 2017, the following measures were investigated: Matching Adjustments (MA), Volatility Adjustmens (VA), Symmetric adjustment meachanism to the equity risk charge (SA), Duration-based equity risk module (DBER), Transitional on the risk free rate (TRFR), Transitional on technical provisions (TTP).

The report shows that 3 out of 4 insurance and reinsurance undertakings do not apply any of the LTG measures, undertakings aopting them represent 74% of the technical provisions of the European market. Those using VA represent the vast majority (66%), followed by those adopting TTP (24%) and the MA (15%).

The report show the effect of removing the measures for undertakings. The effect should be an increase for technical provisions, a decrease for net deferred tax liabilities, a decrease for eligible own funds, an increase for the SCR and MCR. Removing all the measure would lead to increase the amount of technical provisions by 176 bln euro (215 in 2017), to reduce eligible own fund by 127 bln euro (164 in 2017), to increase the SCR by 64 bln (73 in 2017). The effect is lower than last year. The impact on average on the SCR ratio at the European level for undertakings adopting at least one of the measures is -59%pts (last year it was -69%pts). There is a lot of heterogeneity, the datum is affected by two outliers (Germany and UK with -95%pts), Itlay has a little impact: -5%pts. Without the measures, 7% of undertakings would be below the 100% threshold, representing 13% of technical provisions at the European level. In 2017, the number of undertakings at risk to go below 100% was 11%. Thus the criticality associated with applications of these measures is decreasing.

Undertakings adopting LTG measures are more exposed to risk. 1)Credit risk. Almost all investments in bonds by undertakings are investment grade with no difference between undertakings using LTG measures and the others. However, undertakings adopting the LTG measures invest in riskier bonds: +25% in BBB government bonds with respect to the other undertakings and +12% in case of corporate bonds. 2) Interest rate risk. The duration of the assets held by undertakings adopting LTG measures is longer than for the others: +2 years in case of government bonds, +1 year in case of corporate bonds.

Removing the MA would lead to a -81% (companies located in UK and Spain). Without MA, 41% of undertakings using this measure would go below 100%.

The number of undertakings using the VA decreased by 34 in one year. In many countries undertakings using the VA represent more than 80% of technical provisions of the market. 17% of the technical provisions apply both the VA and the TTP. The impact of removing the VA is -17%pts. There are three outliers: Germany, Denmark and The Netherlands with an impact around -40%pts for undertakings adopting the measure. Only 1% of the undertakings using this measure would go below 100% without it. It is interesting to observe that the advantage of the VA comes almost exclusively from undertakings adopting an internal model with a dynamic VA (-56%bps), for those adopting the standard formula or the internal model but without the dynamic VA the effect is limited: -5/6%bps. Undertakings using the VA are more exposed to credit risk than the others: +24% of BBB government bonds or lower grade, +12% in case of corporate bonds.   

The average impact of removing TRFR measures for undertakings using this measure would be 50%pts with a significant effect for France and Greece. The average impact of removing TTP measures for undertakings using this measure would be 75%pts with a significant effect for Germany, Belgium, France.

The picture that deserves a deeper analysis. The main questions are: Are these measures able to accomplish the tasks for which they were designed? Is their application able to level the playing field for insurance companies in Europe?