Solvency II and the low interest rate
environment
Olav Jones
8 October 2013
Insurance Europe
Founded in 1953: 34 members from EU and related areas
Insurance Europe represents 95% of European insurance
market and more than 5 000 European (re)insurers, which:
•
generate premium income of more than €1 100bn
•
employ almost one million people
•
invest almost €8 400bn in the economy
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Why has SII been delayed?
Insurance industry has supported a risk-based system
The Quantitative Impact Study in 2010 (QIS 5), combined with
significant market turbulence, showed that Solvency II
required adjustments to measure all risks correctly
Delay until 2016 needed to get agreement on the changes and
fix Solvency II so it will work as intended
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Adjustments to Solvency II required to take into account
long-term nature of industry
Economic
consequences of longterm liabilities
Problems identified by
QIS 5 in 2010
Solutions
identified
Insurance companies can
reduce or eliminate their
exposure to actual losses
due to temporary falls in
asset prices.
Solvency II was assuming
companies are always exposed to
all market price movements.
Adjust the measures to
recognise the economic
impact and benefits of
the long-term model.
Even if a change (eg shift to
low interest rates) may be
permanent, insurance
companies usually have
many years to address the
issue.
Solvency II was assuming that
any shortfall must be immediately
filled.
This exaggerated the true risk and
created enormous and
unmanageable artificial volatility
in the balance sheet.
Include transition
measures and extend
recovery periods.
This would create unnecessary
financial distress.
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Why this matters?
Insurers’ long-term approach is vital
For policyholders
Access to a wide range of long-term products
Access to additional yield from investing long-term
Sharing/pooling of investment returns among policyholders over
time
For the wider economy
Largest institutional investor, with a long-term perspective
Stable funding for economic growth
Stability and counter-cyclical role during crisis
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With over €8 400bn of assets, getting Solvency II right is
key
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Balance sheet volatility has a very large impact on the
actual capital companies will in practice need to hold
Buffer needed to cope with balance sheet volatility
Surplus
Available
capital
Assets
Risk
margin
Best estimate liabilities
Value of assets
SCR
Total capital companies will need to
allocate to meet Solvency II requirements
as well as coping with volatility created
by the Solvency II measure
Liabilities
Capital
(Own funds)
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Example 1: How much volatility would Solvency II have
created without adjustments?
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Package of solutions under discussion is not ideal but can
avoid Solvency II causing unnecessary damage
Adjustment
What it is meant to achieve
Matching Adjustment
Recognise that in certain cases insurers can eliminate
exposure to asset price volatility (but is exposed to risk of
actual default)
Volatility Adjustment
Recognise that even where conditions for Matching
Adjustment are not met, companies are not fully exposed
to asset volatility
Extrapolation
Recognise that risk free curve needs to be extended
because liabilities can be longer than available market data
Transitional measures
Recognise that long-term nature of business means that
insurance companies both need and have time to adapt
from previous regime, products and market situations to
new one
Extension of recovery
period
Give more time to deal with exceptional situations, such as
falls in financial markets
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What does this mean for low interest rates?
Current low interest rate environment is difficult for some
companies
The volatility adjustment will better reflect the economic
position of the company and avoid exaggerating the low
interest rate issues faced by companies with a mismatch
The transition measures will provide time for companies to
adapt, however companies should not delay in addressing the
issue
Solvency II will encourage new products to be designed in a
way that can cope with the full range of interest rate conditions
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Example 2: Why transition measures are so important to
deal with the current low interest rates
Solvency problems:
can be due to current market conditions => might only be temporary
the long-term nature of the business means that there may be many years to
allow for solving
There is a difference between:
Immediate shortfalls (eg €200m due to a windstorm)
Future shortfalls (eg €200m due to current low interest rates)
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Likely impact of Solvency II
Impact will depend on how Solvency II is finalised
Appropriate package of adjustments to Omnibus II to cope with longterm issues
Appropriate implementation where there are still a large number of
improvements needed (implementing measures)
If we get a reasonable set of solutions then Solvency II will likely
lead to:
Better risk management and very high standards of protection for
policyholders
Better matching of assets and liabilities
Product pricing better reflecting the real risks
Changes in product design (especially on guarantees)
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