MEPs on Tuesday approved reforms to the rules regulating insurance firms, the so-called ‘Solvency II’ rules and a new framework for the recovery and resolution of insurance firms.
The reforms had been agreed informally in December between the member states, represented by the EU Presidency and MEP negotiators, led by Markus Ferber (EPP, DE). On Tuesday Parliament’s plenary adopted the deal with 549 votes in favour, 56 against and 9 abstentions for the update of the Solvency rules, and 475 votes in favour, 37 against, and 99 abstentions for the new recovery and resolution framework.
More money into the real economy
The changes to the Solvency II rules will free up large sums of money which insurance firms had to keep in reserve, allowing the sector to channel more funds into the economic recovery and the European Green Deal more particularly. Currently the cost-of-capital rate, which determines reserve levels, is assumed to be equal to 6%, whereas the update will take this rate down to 4,75%.
Better and more tailored supervision
The update will also simplify supervision while on the other hand empowering supervisors on systemic risks. At the initiative of the Parliament, supervisors will also be required to better cooperate with each other where insurers operate in other Member States.
Factoring in and communicating sustainability related risks
Finally, the update includes new provisions which will require insurance firms to better take into account sustainability-related risks and to report more about these risks so that policyholders can understand a firm’s green credentials.
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Mr Ferber said, “Due to the existing rules. European insurance companies have been forced to hold hundreds of billions of Euros in excess capital above the minimum reserves. Today’s update, releases a meaningful amount of capital that can flow into productive investments such as green infrastructure and digitalisation. For the Green Deal to succeed, private investment is needed. The review allows insurance undertakings to play their part without putting policy-holders at risk.
“The review also enables insurers to make more long-term investments, which will ultimately benefit policy-holders.
“Finally, the review will also make insurance supervision more proportionate and better tailored to the actual risks. Small insurance companies with a simple and safe business model will benefit from reduced administrative burdens.”
Creation of an insurance recovery and resolution system
Plenary also gave the go-ahead to a directive that will set up a recovery and resolution framework, similar to that already existing for banks. It will help deal with failing insurance undertakings, thereby ensuring that these undertakings can be recovered or wound down without taxpayers footing the bill.
The proposal of the Commission is notably improved by making the system more selective, targeting the riskier sectors of the industry more, and more focussed on protecting policyholders. Also, 60% (down from 80% as proposed by the Commission) of the member state’s life and non-life insurance and reinsurance market shall be subject to pre-emptive recovery planning requirements and 40% for resolution planning (down from the 70% as proposed by the Commission). Finally, the review clause lays the ground for the introduction of insurance guarantee schemes in all member states.
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On the recovery and resolution framework Mr Ferber said, “We have managed to improve the Commission proposal in meaningful ways by making the regime more risk-based and focussed on policyholder protection.
“The directive will also include a strong review clause that will pave the way for the introduction of insurance guarantee schemes across the Union. Having insurance guarantee schemes in place in all member states would be the missing link to ensure the highest level of protection for policyholders in case of an insurance undertaking’s failure.”
Next steps
The Council must now also approve the texts, after which the legislation will be published in the EU’s Official Journal and will become law.
Background
The main aim of the review of the Solvency II directive is to strengthen European insurers' contribution to the financing of the recovery, progressing on the Capital Markets Union and the channelling of funds towards the European Green Deal. It is estimated that the rule changes could allow the insurance sector to invest around another EUR 100 billion into the economy, equal to around 0.6% of the EU’s GDP.
The aim of the Insurance recovery and resolution directive is to ensure that insurers and the relevant authorities in the EU are better prepared in cases of significant financial troubles.
Together, the rules should create a more dynamic and yet stable sector.