Changes from report parliamentary committee draft to plenary report

RemovedA similar concern exists regarding the Commission’s proposal to extend audit requirements. Auditors have a role vis-a-vis the public in relation to annual accounts and reports. Auditing the insurance specific information in relation to purely supervisory reporting aspects, such as the SFCR, as proposed by the Commission, may not necessarily be within the competence of public auditors. For that reason, your rapporteur takes the view that reviewing this information should remain the task and responsibility of the supervisory authorities. In this context, it should be noted that supervisors have the power to conduct on-site inspections to perform this task.

Added(a) paragraph 1 is replaced by the following:

RemovedGroup Supervision

Added‘1. An insurance and reinsurance undertaking may apply a volatility adjustment to the relevant risk-free interest rate term structure to calculate the best estimate referred to in Article 77(2) subject to prior approval by the supervisory authorities where all of the following conditions are met:

RemovedSeveral amendments have been proposed by the Commission to extend the scope of group supervision. Where these amendments concern undertakings in other sectors, your rapporteur takes the view that these amendments should have been made, if at all, in the Financial Conglomerates Directives, which purpose is exactly to deal with these cases. The Commission’s approach may lead to cross-sectoral regulatory arbitrage and this needs to be avoided.

Added(a) the volatility adjustment for a given currency is applied in the calculation of the best estimate of all insurance and reinsurance obligations of the undertaking denominated in that currency where the relevant risk-free interest rate term structure used to calculate the best estimate for those obligations does not include a matching adjustment as referred to in Article 77b;

RemovedAnother extension of the scope to include holding companies and horizontal groups (which may include mutuals) is a significant deviation from current practices and policy principles. Your rapporteur takes the view that supervisors should not determine the economic structure of a group and that the contact point for supervision should remain the (re)insurance undertakings which holds an authorisation. The impact assessment on this point does not seem to provide the evidence required for such a major overhaul of established principles.

Added(b) the undertaking demonstrates to the satisfaction of the supervisory authority that it has adequate processes in place to calculate the volatility adjustment pursuant to paragraphs 3 and 4 of this Article.’;

RemovedMacroprudential Supervision

Added(b) the following paragraphs 1a, 1b and 1c are inserted:

RemovedThe Commission’s proposal to require firmer liquidity planning by insurers is welcomed by your rapporteur. However, it is suggested to link this to general risk management requirements, not to macroprudential supervision. Liquidity problems in banks may indeed lead to systemic effects, but this can be hardly claimed for insurers. Extending powers to supervisors for macroprudential purposes should therefore be assessed very carefully. On balance, your rapporteur therefore suggests to streamline the macroprudential toolkit proposed by the Commission.

Added‘1a. Notwithstanding paragraph 1 of this Article, insurance and reinsurance undertakings who applied a volatility adjustment to the relevant risk-free interest rate term structure to calculate the best estimate referred to in Article 77(2) before [OP please insert date = one year before application date] may, without prior approval by the supervisory authority, continue applying a volatility adjustment provided that they comply with paragraph 1, points (a) and (b), of this Article as of [OP please insert date = application date].

RemovedSustainability Risks

Added1b. Member States shall ensure that supervisory authorities have the power to require an insurance and reinsurance undertaking to stop applying a volatility adjustment to the relevant risk-free interest rate term structure to calculate the best estimate referred to in Article 77(2) where the undertaking no longer meets the conditions set out in paragraph 1 of this Article. When an undertaking restores compliance with paragraph 1, points (a) and (b), of this Article, it may request prior approval to the supervisory authorities to apply a volatility adjustment to the relevant risk-free interest rate term structure to calculate the best estimate pursuant to paragraph 1 of this Article.

RemovedSolvency II provides a risk-based prudential supervisory framework that takes into account all risks, including environmental risks. Your rapporteur considers that there is little evidence to suggest that insurance undertakings are systematically underestimating sustainability risks. Your rapporteur therefore takes the view that the current framework is sufficiently capable to deal with sustainable and social risks and is concerned that any amendment in this area may lead to viable and sustainable businesses becoming “un-insurable” or “un-investable” for no good reason. Furthermore, based on the EIOPA Regulation, EIOPA already has the power to present a report in relation to ESG risks.

Added1c. Insurance and reinsurance undertakings may, subject to prior approval by the supervisory authority, apply an undertaking-specific adjustment to the risk-corrected spread of the currency referred to in paragraph 3, under the conditions that:

Added(i) the risk-corrected spread exceeded, during the four quarterly reporting periods prior to the reporting date, the risk-corrected spread calculated on the basis of the undertaking’s portfolio of investments in debt instruments; and

Added(ii) the information that is inherent to the relevant assets of the undertaking and that is reported by the undertaking in line with Article 35(1) to (4) is of sufficient quality to allow a robust and reliable calculation of this adjustment.

AddedThat adjustment shall correspond to the lowest between 125 % and the ratio of the risk-corrected spread calculated based on the undertaking’s portfolio of investments in debt instruments and the risk-corrected spread calculated on the basis of the reference portfolio for the relevant currency. The risk-corrected spread based on the undertaking’s portfolio of investments in debt instruments shall be calculated in the same manner as the risk-corrected spread based on the reference portfolio for the relevant currency, but using undertaking-specific data on the weights and the average duration of the relevant sub-classes within the undertaking’s portfolio of investments in debt instruments for the relevant currency.

AddedWhere the adjustment is applied, the volatility adjustment shall not be increased by a macro volatility adjustment as referred to in paragraph 4.

AddedInsurance and reinsurance undertakings shall immediately stop applying this adjustment when it increases the risk-corrected spread of the currency referred to in paragraph 3 for four consecutive quarterly reporting periods.’;

Added(c) paragraphs 2 to 4 are replaced by the following:

Added‘2. For each relevant currency, the volatility adjustment to the relevant risk-free interest rate term structure shall be based on the spread between the interest rate that could be earned from a reference portfolio of investments in debt instruments for that currency and the rates of the relevant basic risk-free interest rate term structure for that currency.

AddedThe reference portfolio of investments in debt instruments for a currency shall be representative for the assets which are denominated in that currency and which insurance and reinsurance undertakings are invested in to cover the best estimate for insurance and reinsurance obligations denominated in that currency.

AddedFor each currency and each country, the spread referred to in subparagraph 1 shall be the value weigthed sum of the average currency spread on government bonds and the average currency spread on bonds other than government bonds, loans, and securitisations.

Added3. The amount of the volatility adjustment to risk-free interest rates for a currency shall be calculated as follows:

AddedWhere:

Added(a) VAcu is the volatility adjustment for a currency cu;

Added(b) CSSRcu is the credit spread sensitivity ratio of an insurance or reinsurance undertaking for the currency cu;

Added(c) RCScu is the risk-corrected spread for the currency cu.

AddedCSSRcu shall not be negative and not be higher than one. It shall take values lower than one where the sensitivity of the assets of an insurance or reinsurance undertaking in a currency to changes in credit spreads is lower than the sensitivity of the technical provisions of that undertaking in that currency to changes in interest rates.

AddedRSCcu shall be calculated as the difference between the spread referred to in paragraph 2 and the portion of that spread that is attributable to a realistic assessment of expected losses or unexpected credit or other risk of the assets.

AddedVAcu shall apply to the relevant risk-free interest rates of the term structure that are not derived by means of extrapolation in accordance with Article 77a. Where the extrapolated part of the relevant risk-free interest rates takes into account information from financial instruments other than bonds pursuant to Article 77a(1), VAcu shall also apply to risk-free interest rates derived from those financial instruments. The extrapolation of the relevant risk-free interest rate term structure shall be based on those adjusted risk-free interest rates.

AddedThe portion of the spread that is attributable to a realistic assessment of expected losses, unexpected credit risk or any other risk shall be calculated in the same manner as the fundamental spread referred to in Article 77c(2).

AddedBy way of derogation from the first subparagraph, insurance and reinsurance undertakings having their head office in a Member State with a currency pegged to the euro which complies with the detailed criteria for the adjustments for currencies pegged to the euro for the purpose of facilitating the calculation of the currency risk sub-module, as established pursuant to Article 111(1)(p), when calculating the volatility adjustment to risk-free interest rates for the pegged currency and the volatility adjustment to risk-free interest rates for the euro, shall be allowed to calculate a single CSSRcu for both their local currency and the euro, by jointly taking into account the assets and liabilities denominated in euro and their local currency.

Added4. For the euro, the volatility adjustment shall be increased by a macro volatility adjustment. The macro volatility adjustment shall be calculated as follows:

AddedWhere:

Added(a)VAEuro,macro is the macro volatility adjustment for a country co;

Added(b) CSSREuro is the credit spread sensitivity ratio of an insurance or reinsurance undertaking for the euro;

Added(c) RCSco is the risk-corrected spread for the country co;

Added(d) RCSEuro is the risk-corrected spread for the euro;

Added(e) wco is the country adjustment factor for country co.

AddedCSSREuro shall be calculated as the credit spread sensitivity ratio of an insurance or reinsurance undertaking for the euro in accordance with paragraph 3.

AddedRCSco shall be calculated in the same way as the risk-corrected spread for the euro under paragraph 3, but based on a reference portfolio that is representative for the assets which insurance and reinsurance undertakings are investing in to cover the best estimate for insurance and reinsurance obligations of products sold in the insurance market of that country and denominated in euro.

AddedRSCEuro is calculated as the risk-corrected spread for the euro in accordance with paragraph 3.

AddedThe country adjustment factor referred to in point (e) shall be calculated as follows:

AddedWhere RSCco* is the risk-corrected spread for the country co as referred to in the first subparagraph, point (d), multiplied by the percentage of investments in debt instruments relative to total assets held by insurance and reinsurance undertakings authorised in country co.’;

Added(39) Article 77e is amended as follows:

Added(a) paragraph 1 is amended as follows:

Added(i) the following point (aa) is inserted:

Added‘(aa) for the purposes of the disclosures pursuant to Article 51(8), a relevant risk-free interest rate term structure without any matching adjustment or volatility adjustment and determined without the application of the transitional for the extrapolation as set out in paragraph 2 of that Article;’;

Added(ii) point (c) is replaced by the following:

Added‘(c) for each relevant currency and national insurance market a risk-corrected spread referred to in Article 77d(3) and (4) respectively;’;

Added(iii) following point (d) is added:

Added‘(d) for each relevant Member State, the percentage of investments in debt instruments relative to total assets held by insurance and reinsurance undertakings authorised in the country as referred to in Article 77d(4).’;

Added(b) the following paragraph 1a is inserted:

Added‘1a. EIOPA shall lay down and publish, at least on an annual basis, for each relevant currency and each maturity where the markets for relevant financial instruments or bonds of that maturity are deep, liquid and transparent, the percentage of bonds with that or a longer maturity among all bonds denominated in that currency as referred to in Article 77a(1);’;

Added(c) in paragraph 2, the first subparagraph is replaced by the following:

Added‘In order to ensure uniform conditions for the calculation of technical provisions and basic own funds, the Commission may adopt implementing acts which set out, for each relevant currency, the technical information referred to in paragraph 1 of this Article and the first smoothing point pursuant to Article 77a(1). Those implementing acts may make use of the information published by EIOPA pursuant to paragraph 1 of this Article.’;

Added(d) in paragraph 3, the second subparagraph is replaced by the following: