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Solvency II and the low interest rate environment

Solvency II and the low interest rate environment. Olav Jones 8 October 2013. Insurance Europe. Founded in 1953: 34 members from EU and related areas. Insurance Europe represents 95% of European insurance market and more than 5 000 European (re)insurers, which:.

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Solvency II and the low interest rate environment

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  1. Solvency II and the low interest rate environment Olav Jones 8 October 2013

  2. Insurance Europe Founded in 1953: 34 members from EU and related areas Insurance Europe represents 95% of European insurance market and more than 5 000 European (re)insurers, which: • generate premium income of more than €1 100bn • employ almost one million people • invest almost €8 400bn in the economy

  3. Why has SII been delayed? Insurance industry has supported a risk-based system The Quantitative Impact Study in 2010 (QIS 5), combined with significant market turbulence, showed that Solvency II required adjustments to measure all risks correctly Delay until 2016 needed to get agreement on the changes and fix Solvency II so it will work as intended

  4. Adjustments to Solvency II required to take into account long-term nature of industry

  5. Why this matters? Insurers’ long-term approach is vital For policyholders • Access to a wide range of long-term products • Access to additional yield from investing long-term • Sharing/pooling of investment returns among policyholders over time For the wider economy • Largest institutional investor, with a long-term perspective • Stable funding for economic growth • Stability and counter-cyclical role during crisis

  6. With over €8 400bn of assets, getting Solvency II right is key

  7. Balance sheet volatility has a very large impact on the actual capital companies will in practice need to hold Available capital Surplus Value of assets Buffer needed to cope with balance sheet volatility Total capital companies will need to allocate to meet Solvency II requirements as well as coping with volatility created by the Solvency II measure SCR Risk margin Best estimate liabilities Assets Liabilities Capital (Own funds)

  8. Example 1: How much volatility would Solvency II have created without adjustments?

  9. Package of solutions under discussion is not ideal but can avoid Solvency II causing unnecessary damage

  10. What does this mean for low interest rates? • Current low interest rate environment is difficult for some companies The volatility adjustment will better reflect the economic position of the company and avoid exaggerating the low interest rate issues faced by companies with a mismatch The transition measures will provide time for companies to adapt, however companies should not delay in addressing the issue Solvency II will encourage new products to be designed in a way that can cope with the full range of interest rate conditions

  11. Example 2: Why transition measures are so important to deal with the current low interest rates • Solvency problems: • can be due to current market conditions => might only be temporary • the long-term nature of the business means that there may be many years to allow for solving • There is a difference between: • Immediate shortfalls (eg €200m due to a windstorm) • Future shortfalls (eg €200m due to current low interest rates)

  12. Likely impact of Solvency II Impact will depend on how Solvency II is finalised • Appropriate package of adjustments to Omnibus II to cope with long-term issues • Appropriate implementation where there are still a large number of improvements needed (implementing measures) If we get a reasonable set of solutions then Solvency II will likely lead to: • Better risk management and very high standards of protection for policyholders • Better matching of assets and liabilities • Product pricing better reflecting the real risks • Changes in product design (especially on guarantees)

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