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Law360, London (June 16, 2021, 1:10 PM BST ) Insurers and other institutional investors warned the European Union on Wednesday that it should rethink its capital requirement rules to give the sector more freedom to support the bloc's economic recovery from COVID-19.
Two trade groups, Insurance Europe and Invest Europe, urged the European Commission to make changes to the EU's Solvency II Directive, which governs how much cash insurers are required to hold. They say the move will better equip the sector to boost the economy in its capacity as a major institutional investor.
"While Solvency II in general works well, it has also created unnecessary costs and barriers, in particular in relation to insurers' ability to offer long-term products and to invest in long-term assets that can help drive the EU's goals in terms of economic recovery, sustainable growth and the climate transition," the trade bodies said in a joint statement.
The groups said that the commission — the EU's executive arm — should strip away these barriers and allow insurers more freedom to make long-term investments.
The commission should reduce the existing risk margin to allow insurers to invest in longer-term assets, which include green finance projects, the groups added. The risk margin requires life and pensions insurers to hold on to a significant amount of extra capital to protect against the possibility that a client lives longer than expected.
The margin is unpopular with insurers, which say they are required to retain too much extra money when interest rates are low.
They also urged the bloc's executive not to impose any increases in the capital requirements obligations that insurance companies are subject to. These requirements force insurers to hold extra capital reserves to ensure they can withstand unexpected financial shocks.
The trade groups highlighted the fact that insurers are a significant institutional investor in the region and that the sector's investment portfolio is equal to 58% of the bloc's gross domestic product.
The groups added that current Solvency II rules also hamper the ability of insurers to invest in equities, which are a major plank of the bloc's so-called capital markets union project. The project aims to improve the flow of cross-border lending from sources outside banking for small businesses.
The warning comes after the European Insurance and Occupational Pensions Authority, the sector's bloc-wide regulator, published plans for the reform of Solvency II that insurers criticized as too cautious. These proposals would mean the sector has a €60 billion ($73 billion) shortfall in the cash it could use to underwrite risks or make investments, Insurance Europe said in March.
That kind of cash hit, a consequence of higher capital buffer requirements, could translate to some €170 billion of lost equity investments, the body said. It would also mean a €680 billion hit to corporate bond investments.
The commission opened a public consultation on the Solvency II regime in 2020, saying it would consider whether they are still "fit for purpose" after the COVID-19 pandemic hit the sector.
The watchdog said in December that it did not want to make fundamental changes to capital adequacy rules for the sector, in a move that insurers described as disappointing.
--Additional reporting by Martin Croucher. Editing by Joe Millis.
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