Last 1^st July 2020 the European Commission (EC) published a consultation document regarding the review of SII, which the Insurance companies are invited to reply to by next 21^st October 2020. The responses will provide a guidance to the Commission, although they will not prejudge its final decision.

The prudential supervision aims at minimizing the risk for the policyholders to incur a loss in case of failure of the insurance institutions: indeed, policyholders are often less aware than the insurance companies regarding their ability to fulfil the terms of the contracts. Even if the SII framework seems to work well at European level, a number of topics deserve a review to take into proper consideration all the relevant risks, without tying the industry. The EC has already made several amendments to the framework, also in the direction of facilitating insurers financing the real economy, but some areas still need to be covered. EIOPA is analysing 19 topics identified by the EC in their formal request for advice dated February 2019, but, in parallel, with this public consultation, the EC has expressed the wish to collect a broader feedback from a wider audience, capable of highlighting needs and difficulties proper of the industry.

The public consultation covers four areas

• PRIORITIES, LONG-TERM AND SUSTAINABLE INVESTMENS

The current market environment, characterized by a low level of interest rates and high volatility, together with the current principles and rules set out by the SII framework may push insurance companies to

• avoid more long term, and thus illiquid, assets like infrastructure projects
• search for the yield by investing in more complex, and thus risky, securities
• shift the risk to the policyholders via distribution of Unit Linked products

The EC wonders whether the European legislation should

• be more focused in fostering long-term investments in the real economy and in providing long term financing to European companies, including Small and Medium-sized Enterprises (SMSEs), to avoid a negative turn on the European economic growth
• facilitate insurers to offer sufficiently high returns even if this implies taking more risks and allow them to apply a dynamic modelling of the Volatility Adjustment (VA) to reduce the cost of investing in bonds
• make less/more costly for insurers to invest in “green supportive” / “brown penalizing” factor in view of the European Green Deal, which should make Europe the world’s firs climate neutral continent by 2050
• in case of insurance groups, allow public authorities to supervise the solvency position of the group only (and not of individual insurers), implying the possibility of compensations among the group

• PROPORTIONALITY AND TRANSPARENCY

The EC wonders whether to

• increase the quantitative threshold of exclusion, set in 2009, which exempts very small insurance companies from applying the SII directive. This would reduce the regulatory burden for small insurers and probably lower the premiums they ask for, but would also reduce the protection for their policyholders and would go against the integration of the Single Market within the EU
• introduce unambiguous criteria regarding the implementation of the proportionality principle, that may have been hindered by the high level of discretionary power held by the supervisors
• review the access (e.g. sent by email to each policyholder?), scope/format (level of information and length) and timing (less than on a yearly basis?) of the Solvency and Financial Conditions Report (SFCR)
• force insurers applying their Internal model to calculate and publish their SII position under the SF for information purposes

• TRUST AND SINGLE MARKET

The EU passporting system enables insurers that have obtained a licence to operate in a Member state under SII rules (supervised by the Home authority) to operate in any other Member state of the EU (not supervised by the Host authority). As over the recent years the public trust in the Single Market has been challenged by some failures of insurers operating cross border, the EC wonders whether the Host authority should be provided with additional powers of intervention or whether the supervision should be exercised by a European authority.

With the aim of addressing insurance failures, a majority of Member States have already introduced national Insurance Guarantee Schemes (IGSs), founded by the insurance industry, that pay the benefits to the policyholder or ensure the continuation of their contracts in case the insurer fails. The EC wonders

• whether the IGSs should become compulsory for all Member States and whether the European legislation should set a minimum coverage at EU level
• which insurance products should be protected by IGS and whether all mandatory insurance should be covered by IGS

Given the very hard time Insurance companies had in the last period and given that their economic and social role, the EC wonders whether

• public authorities should have the power to
  • temporarily prohibit redemptions of life insurance policies
  • reduce the entitlements of the policyholders (e.g. reducing the bonuses)
• the SII framework is sufficiently reactive to crises situations (like the covid-19 outbreak) to both protect the policyholders and unload the companies from the regulatory reporting

• EMERGING RISKS AND OPPORTUNITIES

The EC had a thought on climate change and cyber risk.

Regarding the climate change, as EIOPA has pointed out that the current European legislation does not properly reflect the climate change risk and does not provide the right incentives to Insurance companies that are exposed to climate changes, both through their investments and underwriting activities, the EC wonders whether to

• include additional types of natural catastrophes within the SF
• formally require to assess if the historical data used to evaluate the liabilities sufficiently capture trends caused by the climate change and to perform climate scenario analysis as part of Pillar II

Regarding the cyber risk, that is getting one of the main operational risks faced by the organizations, the EC wonders whether to

• introduce the request of monitoring and managing the Information and Communication Technology (ICT) risk as part of Pillar II
• consider cyber-insurance as a distinct class of insurance, undergoing its own authorization process