New Solvency II proposals won’t settle disputes on capital levels: Fitch

The European Insurance and Occupational Pensions Authority (EIOPA) has released its recommendations on “long-term guarantee products” in the Solvency II regime, but one firm says the proposals aren’t enough to cool disputes between insurers and regulators.

Last Friday, the EIOPA published its Technical Findings on the Long-Term Guarantee Assessment (LTGA), a task it was given by the European Parliament, the European Commission and the Council of the EU.

For its review, the organization tested the “long-term guarantee package,” potential measures of the Omnibus II Directive (often called Solvency II) related to “the supervisory treatment of long-term guarantee products under volatile and exceptional market conditions.”

Overall, the organization supported including or slightly amending many of the potential measures, with some exceptions.

The EIOPA did propose replacing the so-called Counter-Cyclical Premium crisis measure with a simpler process, called the Volatility Balancer, “which would deal with the unintended consequences on undertakings’ capital requirements of short-term volatility.”

It also proposed excluding the Extended Matching Adjustment, arguing that it wouldn’t provide enough protection for policyholders and would be “unduly difficult to supervise.”

EIOPA chairman Gabriel Bernardino said the organization is confident that the results of the LTGA and its advice will allow European political institutions to make an informed decision on the long-term guarantee measures included in Solvency II, which he added “is a sound framework that needs to be implemented as soon as possible.”

However, in a statement Monday, Fitch Ratings said the proposals aren’t likely to resolve the dispute between insurers and regulators on appropriate capital levels.

The proposals “contain some concessions on capital requirements for when bond markets are particularly volatile,” the firm said. “But the industry is unlikely to be satisfied by this, given the potentially significant extra capital that might still be needed to support business with investment guarantees.”

The investment guarantee products are particularly important for insurers operating in several European markets, especially Germany, Fitch added.

The firm also said that several major insurers consider the LTGA to be “inconclusive because the scenarios underlying the assessment were not, in their opinion, meaningful.”

“We expect the latest proposals will be just a starting point for more negotiations, potentially leading to further impact studies before any final decisions are made,” its statement said.

“The process is at risk of extending beyond the end of the current European Parliament and European Commission next year, which could lead to even longer delays as a new set of politicians would have to take over the process of bringing Solvency II into force.”

Overall, Fitch said it doesn’t expect Solvency II or the deliberations around its implementation, to have a significant impact on insurers’ balance sheets or overall credit ratings.