Reviewing the gold-standard – the EU supervisory regime overhaul and international standards
October 12, 2022
In 2016, the common European supervisory framework, Solvency II, entered into force. European legislators spent many years developing what is the global gold-standard in insurance prudential regulation, now. 5 years into application, the system is currently reviewed. When European Commissioner Mairead McGuinness presented the legislative proposal in September last year, she called it an evolution and not a revolution. But what does it mean for a system which is, already, bowing under its complexity and conservative design compared to similar systems around the world.
Adjustments to better reflect the dynamics of a low-interest environment, a more proportionate application of the regime, a reflection of the sustainability challenges, a reduction of the overall regulatory burden and moderate capital reliefs were the priorities for EU regulators. During the debates of the EU Co-Legislators (the European Council and the European Parliament), more immanent political objectives materialised. Protecting own grounds on the side of national governments, a strong desire to “use” insurers’ investments to get EU capital markets going, and activism to fight climate change and differing views on the necessary level of prudence in the framework influenced the technical debate.
The big question will be how co-Legislators will square the circle and bring all these objectives into one text. The industry is engaging to emphasize the need for a meaningful review. Along with the aspects outlined above, competition in the EU single market and the competitiveness of EU insurers globally should be key considerations in the current review.
The parallel discussion at international level, where the International Association of Insurance Supervisors (IAIS) is testing its International Capital Standard (ICS) 2.0, highlights the need for EU policymakers to engage closer with the global debate and consider the wider picture when reviewing the European regime. Fundamental elements of Solvency II, like the opportunity for insurers to develop internal models, are a fundamental part of the European framework but have not been fully agreed at international level. Certain capital buffers which must be held by European insurers, such as the risk margin, are not replicated elsewhere in the international context – or at least not to the same extent – and put European insurers at a disadvantage to their international peers.
The common objective of all prudential regulatory regimes around the globe, including the ICS 2.0, is adequate consumer protection. This primary objective should neither be sacrificed at EU or international level. In order to ensure that the ICS 2.0 becomes a true international standard, it is therefore, that current positions are reassessed more holistically. EU regulators should not lose the competitiveness of their market and the competition in the EU single market out of sight to make the Solvency II Review a success. And, more engagement and interaction with global peers is necessary to find common ground for the ICS 2.0. The international standard must not be golden, but it should also not be the smallest common denominator of regulatory systems around the world.
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