Insurance: the major overhaul of Solvency II

While they are still evaluating the impact of the technical package of “Solvency II” rules (by playing the clock a bit), Moroccan insurers will have to deal with a new version of these prudential rules in three years. The requirements are tougher on financial communication and reporting of climate impacts.

The European Commission is accelerating its project for a complete revision of “Solvency II”, the prudential rules applied to insurance companies in force since 2016 for an application of the reform by 2025 at the latest. “The revision aims to strengthen the resilience of the insurance and reinsurance sector in the face of new crises, and to better protect policyholders”, justifies Brussels.

The current review of the Solvency II rules covers a fairly broad spectrum, even if the fundamental principles, in particular the three pillars and a prudential balance sheet in market value, are not called into question. Review of the main measures of the draft directive initiated by Brussels.

On the quantitative requirements, the future “variant” of Solvency II will have an impact in terms of higher capital requirements in order to better cushion the most extreme shocks and the volatility of the financial markets. It will have to better take into account the low interest rate environment and, on the other hand, support sustainable long-term investment, deciphers an expert.

In addition, for insurers using internal models, an obligation to calculate and communicate to the supervisor the capital requirement assessed according to the standardized approach would be introduced. On control and financial communication, the requirements would be substantially reinforced. Thus, the independent audit of the prudential balance sheet would become mandatory. The public report on solvency and financial situation would be split, one intended for policyholders (the general public) and the other oriented towards investors. Regarding proportionality, a new simplification framework would be introduced for insurers whose risk profile is deemed to be “limited”.

This categorization will allow companies to automatically benefit from simplification measures on the three pillars. On governance, insurers with a “limited” risk profile should update their policies relating to internal control and audit, risk management and outsourcing only every three years rather than every year.

In addition, the possibilities of combining key functions would be clarified. In addition, the Solvency II exemption thresholds would be raised. This aspect is very important because it leaves open the possibility for regulators in third countries, including Morocco, to introduce arrangements that are in phase with the environment of their markets. It will therefore not be a question of transposing the future directive in extenso. Same flexibility envisaged on group supervision.

Consideration of climate risks

On macro-prudential issues, the revised Solvency II rules reinforce the requirements. The main new features concern better consideration of systemic risks, stricter supervision of liquidity risk with the development of a liquidity risk management plan and the introduction of new powers for the supervisor, in particular on the restriction payment of dividends from an insurer in the event of exceptional circumstances.

This is exactly what many regulatory authorities in the banking and insurance sector had ordered in order to contain the impact of the Covid crisis on equity.

In this sense, this health crisis will have served as training. On sustainable finance, a framework for taking into account climate and biodiversity risks would be put in place. The introduction of an obligation for insurers to identify their significant exposure to climate change risks and to assess, where appropriate, the impact of climate change scenarios is proposed in the draft directive.

The European Insurance Regulatory Authority has been given a mandate to study, by June 2023, a possible risk differential and a prudential treatment dedicated to “green” and “brown” assets. On the framework of cross-border activities, the introduction of additional measures is intended to supplement the powers of the European regulator of the insurance sector and the coordination between authorities for the supervision of cross-border activities, as well as the possibility in certain cases of seizing .

Abashi Shamamba / ECO Inspirations

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