Amendments to the Solvency 2 regulation published in the Official Journal12/08/2019
The new Delegated Regulation 2019/981 (link) about the Solvency 2 regulation was published in the Official Journal of the European... View Article...
The European Commission issued on March 8th new amendments to the Solvency 2 regulation (2015/35). These amendments will be under review by the European Parliament until June.
“On 8 March the Commission adopted the Solvency II delegated regulation to help insurers invest in equity and private debt by reducing their capital requirements for investments. The regulation, which amends the Solvency II directive, is set to boost private sector investment, a key objective of the Capital Markets Union Action Plan. The amendments will now by subject to three months of scrutiny by the European Parliament and the Council.”
The full text of amendments is here.
Main topics (our analysis is limited to market & counterparty SCR):
[The following details are a summary only, and all changes may not be reflected as we focused on the main impacts]
Long term equity investments, under specific conditions, will have a lower SCR in this new version.
This is the most discussed topic in this new version of Solvency 2, and the one that has changed the most since the December 2018 initial draft provided by the European Commission.
A long-term equity investment will have a 22% shock instead of 39% or 49% +/- dampener.
|Last version (8 March 2019)||Previous version (December 2018)|
|Sub-set and the holding period of each investment perfectly identified||Sub-set and the holding period of each investment perfectly identified|
|Cover the Best Estimates (BE) of one or several identified businesses – and no changes allowed|
|Managed separately (assets & liabilities)|
|Only a part of the total business|
|Average holding period of more than 5 years, if less then no sell allowed till the average period is below 5 year||Average holdings period higher than the liabilities average duration, and more than 12 years|
|Listed or unlisted equities, having their head offices in EEA countries||Listed or unlisted equities, having their head offices in EEA countries|
|Ability to hold the position of each individual equity for at least 10 years||Ability to hold the investments – ongoing and stressed conditions – more than 12 years, to be demonstrated to the regulator|
|All processes (risk management, ALM & investment policies) includes the 5 and 10 years periods above||ALM & investment policies include the intention to hold the investments for a long period|
Summary of changes for long-term investments (vs December 2018 version) :
[Comments by the French Finance and Economy Minister : here ]
A lower equity SCR may be applied to unlisted equities (type 1 instead of type 2) in this new version.
Insurance companies are now allowed to consider as type 1 equities (e.g. shock of 39% +/- dampener) any portfolio respecting the following criteria:
The use of internal ratings will be allowed in some cases in the new version.
176a – assessment
This part lists criteria that allow to assess a CQS 2 or a CQS 3, depending of the subset of criteria that are met. The list includes the own internal rating defined by the insurance companies.
176b – requirements on assessments
This part lists criteria when assessing an internal rating for a bond or loan.
Article 176c – assessments based on an approved internal model
Maybe the more interesting part, or anyway an area to explore.
Insurance companies are now allowed to use “someone else” internal rating model – which has to have been approved by a regulator – when co-investing jointly in an unrated bond or loan.
The co-investor could be of any type, and has only to run an approved internal model.
RGLA (regional government and local authority bonds & loans) included in the 2015/2011 Regulation will be treated as EEA government instruments.
So far, RGLA had to be considered as:
And bonds guaranteed by a 2015/2011 RGLA had a Spread SCR.
In the new version:
The overall approach changes but the rationale is still the same, and CQS evolve from integer number into decimal number.
A CQS assignation is based on the Solvency ratio – this CQS could be a decimal number, as it has to be interpolated.
Based on this (decimal) CQS, the risk factor g(i) is affected to the single-name exposure.
In our opinion this is done to give headaches to all Solvency 2 software developers – Pillar 1 or Pillar 3 – who considered the CQS as an integer.
In the counterparty risk module, derivatives will be classified in 4 different types, and CDS will be excluded.
Derivatives were not previously fully classified, and the application to the counterparty risk module was subject to interpretation. As an example, it was considered that futures, as cleared in a regulated CCP, were not included in the module.
Now the definitions are much clearer, and we will have 4 cases of derivatives to be handled.
Note that CCP cleared derivatives will generate a counterparty risk, but 5 times lower than “full OTC” products.
CDS will be excluded from the counterparty risk module (they will be dealt with in the spread module).
In order to apply netting and lower SCR calculations, conditions to comply with will be easier to respect, in particular for the roll frequency of hedges.
We still have the prorata temporis for less than one year hedging positions without systematic rolls, but have now different criteria to fully consider less than one year hedges.
Maybe the most important is the roll frequency, which went from 3 months to 1 week. Additionally the accepted frequency could even be higher than 1 week in case a market event affecst the solvency position of the insurance company.