Stakeholders should look beyond asset calibration in the long-term investment debate, according to a European Commission official.
Speaking at the 6th Annual Solvency II European Conference of the French Federation of Insurance Companies (FFSA)*, Steve Ryan, Deputy Head of Unit, Insurance and Pensions, European Commission, said that he could foresee a lot of pressure to open the discussion on calibrations for assets in Solvency II well before 2018. This view was confirmed by the French Finance Minister Michel Sapin, in his speech to the conference.
The Solvency II Delegated Acts include a provision for reviewing the standard formula SCR calculations by 2018.
However, Mr Ryan did not entirely agree with what he called the disproportionate attention given to the question of calibration in the debate about long-term investment. He said that the Commission was taking a much broader approach to the subject. And while he noted that the Commission had already made a major effort on high quality securitisation, and would look at it again, he called on all stakeholders to avoid “fetishizing” this issue.
Mr Ryan explained that calibration was not a capital requirement in itself. Because, for example, the calibration of 39% for shares in the lower equity bucket usually translated to a capital charge of less than 20% when taking into account factors such as deferred taxes and diversification. In addition there is a matching factor between assets and liabilities.
Mr Ryan revealed that the Commission is working on a Green Paper on Capital Market Union, which may well include a legislative initiative on securitisation.
Persistent industry offensive
The insurance industry has been arguing all along that some Solvency II capital charges are overly punitive and could prevent insurers from investing in long-term assets. More recently it has harnessed the political zeitgeist of promoting long-term investment and boosting growth in Europe in order to argue for a reduction of charges on certain asset classes including securitisation and real estate. The capital charges on securitisation have been reduced in successive drafts of the Delegated Acts (see Solvency II Wire 21/6/2014, 7/9/2014 & 21/9/2014). Last month, Jacques de Larosière, one of the architects of the post-crisis European regulatory system and Chair of the industry lobby group Eurofi, used his keynote speech at the EIOPA conference in Frankfurt to call on policy makers to consider further reduction of capital charges. “In spite of the progress made in the Solvency II framework,” Mr de Larosièr, said, “I am still somewhat uneasy with the capital treatment of long-term instruments, which in my view, tends to discourage equity and infrastructure investment because duration or volatility are considered as the main drivers of risk rather than the intrinsic risk of the asset itself.” “More generally it seems to me that one should pay more attention when determining capital charges to the expectation of default as a way to capture counter-party risk, in particular when the assets are matched with long term liabilities rather than mainly focusing on market volatility or seniority in the position of the tranches.” At the Paris event a number of industry representatives including Denis Kessler, Chairman and CEO, SCOR SE and Henri de Castries, Chairman and CEO, AXA Group, lined up to call on policymakers to reduce the charges in order to allow institutional investors to make long-term investment in Europe.
No signs of regulation constraining growth
The Commission’s perspective on long-term investment is not unique. Others have also argued that modifying capital charges should not be used to promote growth. Gabriel Bernardino, Chairman of EIOPA, told delegates that calibration to the underlying risk was one of the basic elements of a prudential risk based regime. “If the political powers want to give some incentives [to promote long-term investment] there’s many other ways to give incentives.” EIOPA published a report on the Standard Formula design and calibration for certain long-term investments in December 2013 in which it defined what it believes are appropriate calibrations that balance risk and incentives. These calibrations were watered down in the run up to the publication of the Delegated Acts. Opposition to the reduction of capital charges has come from some political quarters as well. Sven Giegold, MEP for the Greens, has cautioned against what he called the “arbitrary manipulation of solvency capital requirements”, which he argues are putting policyholders at risk and are contradictory to the principles set out in Article 101 of the Directive. Article 101 states that the SCR is to be calibrated in such a way as to ensure that “all quantifiable risks to which an insurance or reinsurance undertaking is exposed are taken into account”, over a one year horizon. On 10 December Mr Giegold tabled a motion calling for the Parliament to object to the Delegated Acts on the grounds that the reduction of the capital charges is not backed by evidence and contravenes Article 101. The objection states, ”The Commission has not formally provided any evidence that these calibrations are based on the principle laid out in Article 101 but has, instead, informally cited political reasons for deviating from the initial advice of CEIOPS/EIOPA on some of the measures.” The motion is scheduled for a vote in plenary on 17 December. It is expected to be voted down as the overwhelming majority in ECON agree not to object to the text (first revealed by Solvency II Wire 20/11/2014). The link between reduced capital charges and growth have been further called into question by Svein Andersen, Secretary General of the Financial Stability Board. He told the Paris conference that he did not entirely agree that regulation was the cause of malaise in Europe. ”What makes me say that,” he explained, “is that many of the kinds of rules, at least that the FSB has been involved with, are being implemented in many many (sic) other countries than in the European Union and we see absolutely no signs that that is having any constraints on growth in the United States, Canada, Scandinavian countries or Switzerland for that matter.” — * Mr Ryan addressed delegates in French and English. A Commission spokesperson confirmed the information. To subscribe to the Solvency II Wire mailing list for free click here.
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