Insurer groups split on EIOPA harmonisation plan

Insurer groups split on EIOPA harmonisation plan

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British, German and European-wide insurer groups are in diagreement about whether it would beneficial to have a harmonised approach to recovery and resolution, after the European Insurance and Occupational Pensions Authority (EIOPA) published a proposal for a new European framework.

EIOPA called for an EU-wide recovery and resolution framework for insurers, focused on preparation and planning, early intervention, resolution, and cross-border co-operation and co-ordination, in an opinion paper released on July 5.

The organisation said a minimum degree of harmonisation would help protect policyholders and maintain financial stability in the EU.

The proposal could shape the European industry over the years to come, and some in the sector are more welcoming of the idea than others.

“It is pragmatic for firms and regulators to give some advance thought to and planning for recovery and resolution,” said Steven Findlay, head of prudential regulation at the Association of British Insurers (ABI).

The proposal “rightly promotes the need for co-operation between national authorities in the event of distress in a cross-border insurance group,” he added.

But the German Insurance Association (GDV) was less positive. It had already raised concerns during the official consultation process about whether Europe needed a harmonised resolution framework for insurance groups.

“There is no evidence that normal insolvency procedures would be unsuitable to deal with insurance failures,” the group said in the consultation. “Avoidance of fragmentation is not a justification in itself for suggesting additional regulation since certain differences — as admitted by EIOPA — do necessarily reflect market specifics in some member states,” it added.

When contacted after the publication of the opinion paper, the group said: “EIOPA has only partly reflected our concerns in its final opinion.”

Alexandru Ciungu, policy adviser for macroeconomics and taxation at Insurance Europe, a continental insurance federation, also believed that there was no a pressing need for harmonisation.

“Whenever there was a case in the past when an insurer ran into trouble, either the existing tools were sufficient to successfully resolve the insurer, or where the legal framework didn’t exist, the country simply adopted that framework,” Ciungu said.

But Ciungu could see an advantage of harmonisation if a large insurer with cross-border business needed to be resolved. “A certain degree of harmonisation in the field of cross-border supervisory co-operation would make it clear for the supervisors and authorities involved who should do what,” he said.

GDV agreed that it was worth looking into increasing cross-border co-operation. But the association added that “this could be adequately addressed by co-ordination agreements between the supervisors involved and would not require changes in the legal framework”.

BRRD for insurers?

EIOPA's proposed framework could be similar to the banking resolution and recovery directive (BRRD), which harmonises the regulations covering the resolution of banks in the EU. The BRRD also aims to ensure that banks will no longer require bail-outs from the state; instead, debt instruments are designed to be written off in the event of a capital shortfall.

“Is the European Commission (EC) going to produce a whole new legislative package for insurers, like for the banks we had the BRRD? Or is it simply going to make some amendments and add some additional material to the current Solvency II package?” asked Claire McNicol, senior financials credit analyst at Rabobank.

McNicol expected that new legislation for insurers would involve targeting institutional bondholders and giving the EC the power to wind-up insurers.

Insurers can already issue restricted tier one (RT1) bonds, which can be written off or converted into equity when an insurer’s solvency ratio falls below a certain level. They are similar to the loss-absorbing additional tier one (AT1) notes which banks issue. However, unlike banks, insurers are not required to issue them.

“We’ve not seen RT1s from a major player in a major currency,” McNicol said. “It’ll be interesting if insurers are actually forced to issue specific type of bail-inable debt; be that in a RT1 form or be that in a new form altogether, which could be something similar to the banks’ senior non-preferred.”

But Insurance Europe's Ciungu did not think insurers would be made to issue bail-in debt. If the EC understands the “significant differences” between banking and insurance (in terms of business model, balance sheet structure and regulation), “we would not expect a huge framework to force insurance companies to issue new types of debt,” he said.

EIOPA also said explicitly in its proposal for an insurance resolution framework that early intervention powers should not include a new intervention point for supervisors, above the solvency capital requirement (SCR).

Under Solvency II, which was applied in 2016 to create a harmonised regulatory regime, the SCR and minimum capital requirement (MCR) are used to determine when the supervisor can introduce recovery measures or put an insurer in resolution.

“These are already two points of intervention which allow sufficient leeway for supervisory intervention,” Ciungu said.

All things being equal?

Globally systemic important insurers are already subject to the Financial Stability Board’s criteria for group-wide supervision and recovery and resolution planning. But smaller insurers operate in a more lenient regulatory environment. 

The cost of complying with regulation “could potentially be quite punitive for smaller players,” but have a potential upside for larger insurers, according to McNicol.

EIOPA wrote in its opinion paper: “In order to avoid excessive administrative burden for both insurers and national (supervisory and resolution) authorities, a harmonised recovery and resolution framework should have proportionality as a fundamental guiding principle.”

ABI's Findlay was supportive of EIOPA's efforts to minimise the complexity of any potential legislation. “There is due recognition that this work should be proportionate to the low likelihood of such a scenario ever occurring,” he said.

The opinion paper also asserted that member state should be able to waive certain requirements of the framework for specific insurers, particularly for requirements to develop and maintain pre-emptive recovery and resolution plans.

McNicol did not think it would be a good idea “if member states start taking different approaches,” which is what has happened with Solvency II, in her opinion.

“There are a great deal of transitional approaches that are applied differently in different areas and I think that it causes fragmentation in the market,” McNicol said, pointing to the different transitional agreements applied in Germany and the Netherlands. German insurers had a much longer transitional period, and their average solvency ratios are higher.

“Does that mean the Dutch are less well capitalised than the Germans? No, it just means that they don’t have the same transitional agreements in place,” McNicol said.

It could be some time before any legislation is passed. It is thought the EC is planning to come up with a response in the fourth quarter of 2017.

“It’ll go round and round in circles several times between EIOPA and the EC before it ultimately heads to the European Council and European Parliament to be actually enacted, and of course they’re all relying on EIOPA for technical advice,” McNicol said. 

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