Press Release

Contact: Anzhelika Mayer Phone: +49 (0) 69 95 11 19 6 8 [email protected]

RESULTS OF EIOPA LONG TERM GUARANTEES ASSESSMENT EIOPA provides its technical advice on the way forward for the introduction of the Solvency II long term guarantee package

Frankfurt, 14 June 2013 – The European Insurance and Occupational Pensions Authority (EIOPA) has published today its Technical Findings on the Long-Term Guarantee Assessment (LTGA). EIOPA conducted the assessment at the request of the Trialogue parties (the European Parliament, the European Commission and the Council of the EU) as input to the political discussions on finalisation of the Omnibus II Directive. The LTGA tested the so-called Long-Term Guarantee package - a set of potential measures aimed at ensuring an appropriate supervisory treatment of long-term guarantee products, under volatile and exceptional market conditions. EIOPA concluded that the final Long-Term Guarantee package to be included in the Solvency II framework should fulfil a number of principles in order to ensure a high degree of policyholder protection, as well as effective supervisory process: •

Alignment with the Solvency II framework and the economic balance sheet concept;

•

Full consistency and comparability in order to enhance the single market;

•

Efficient linking of all the

three pillars (quantitative basis, qualitative

requirements and enhanced reporting and disclosure); •

Proportionality and simplicity;

•

Adequate treatment of transitional issues.

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On the basis of the assessment and the outlined principles, EIOPA supports the inclusion of some of the measures tested: Extrapolation, “Classical” Matching Adjustment, Transitional measures and Extension of the Recovery Period, with slight amendments to provide the right incentives for sound risk management. EIOPA advises to exclude the so-called Extended Matching Adjustment on the basis that it would not provide sufficient policyholder protection and would be unduly difficult to supervise. In addition, the Counter-Cyclical Premium was judged to be likely to have an adverse financial stability impact due to the way it would be triggered, as well as the perverse impacts on undertakings’ solvency requirements that it generated. As a consequence, EIOPA advises to replace the CCP with a simpler, more predictable measure, the Volatility Balancer, which would deal with the unintended consequences on undertakings’ capital requirements of short-term volatility. EIOPA further recommends that the impact of the application of the measures on the solvency position of individual undertakings be publicly disclosed as part of the normal disclosure process. More details on the EIOPA advice are available in the Note for Editors below. Gabriel Bernardino, Chairman of EIOPA, said: “We are confident that the results of the LTGA, combined with the EIOPA advice will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations”. As he underlined “insurance business is about promises towards policyholders. Both undertakings and supervisors should ensure that these promises are fulfilled and Solvency II will increase that likelihood. Solvency II is a sound framework that needs to be implemented as soon as possible. Experience will help us to further improve the regime once it is already in place”.

Page 3 of 4 Note for Editors: Long Term Guarantee Assessment EIOPA has been asked by the Trialogue parties (the European Parliament, the European Commission, the Council of the EU) to assess a series of potential measures aimed at ensuring an appropriate supervisory treatment of long-term guarantee products, also under volatile market conditions. EIOPA has conducted its technical assessment, collecting both qualitative and quantitative information from insurance and reinsurance undertakings, supervisory authorities and the European Systemic Risk Board on the effects of the proposed Long Term Guarantee Package Counter Cyclical Premium Crisis measure to complement market observations when these are determined to be temporarily unreliable or unfit for the prudential purpose, due to spread-related crisis situations in financial markets. EIOPA advises based on the outlined concerns relating to its effectiveness of this crisis measure and to potential financial stability considerations , to replace the CCP with a predictable volatility adjustment mechanism. This simpler measure would be called the Volatility Balancer. Volatility Balancer – Substitute for the Counter-Cyclical Premium. It would be designed to deal in a predictable and permanent way with the unintended consequences of volatility. The VB would be simple, supervisable and comparable, applicable to all insurance business except unit-linked (and unless the business applies Matching Adjustment). It would be calculated as a predictable adjustment to the relevant risk free rate - to deal with competition distortions within the single market. It might turn negative under certain conditions, however, this will depend on the final calibrations of the device. “Classical” matching adjustment – Permanent measure providing an adjusted risk-free rate for (re)insurance annuities managed under a strict asset liability matching regime, which does result in an immaterial exposure to short-term market volatility. EIOPA advises to implement the “Classical” Matching Adjustment including the strict criteria relating to the credit quality of investments. Furthermore, EIOPA suggested some minor amendments to the measure. Extended matching adjustment – examines the extension of the former measure envisaged to cover business of a long-term nature, but with a lower degree of certainty and predictability of cash-flows. Extrapolation – examines properties of modelling used to value liabilities in order to supplement market observations when reliable market information is no longer available. EIOPA advises to select a convergence period that is significantly longer than 10 years (e.g. 40 years) for the Euro . Furthermore, in order to reduce potential unwanted consequences of the parameter choice for extrapolation, dedicated Pillar 2 measures should be applied. Extension of the recovery period – measure to allow for an adjustment of the supervisory reaction to an individual breach of the solvency capital requirements, in cases of exceptional falls in financial markets. EIOPA advises to implement the Extension of the Recovery Period. However, the strict and sole link of the length of extension to the duration of liabilities seems to be too simple given the multitude of factors that determine the decision for the application of the measure. Furthermore, the proposed maximum length of extension needs further review, but should not go beyond the currently proposed 7 years. EIOPA further advises to consider a broadening of the triggers to the measure which would enable an application in crisis situations that are not directly linked to a steep fall in financial markets, e.g. low interest rate crisis or even a combination of major insurance risk events. Transitional measures– measures providing a smooth transition to Solvency II for certain long-term guarantees business underwritten under Solvency I economic and prudential conditions, avoiding disruptive events whilst ensuring right incentives. EIOPA advises to implement transitional measures as part of the LTG package. In order to make these measures available for a broader application, EIOPA also advises to complement the tested measure with a second measure that is able to address further issues also related to the different valuation of technical provisions under Solvency I versus Solvency II.

Page 4 of 4 The European Insurance and Occupational Pensions Authority (EIOPA) was established on 1 January 2011 as a result of the reforms to the structure of supervision of the financial sector in the European Union. EIOPA is part of the European System of Financial Supervision consisting of three European Supervisory Authorities, the National Supervisory Authorities and the European Systemic Risk Board. It is an independent advisory body to the European Commission, the European Parliament and the Council of the European Union. EIOPA’s core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries.