COVID-19 pauses regulatory battles for insurers

19 June 2020: Insurance Asset Risk editor Vincent Huck writes for ICAEW that Insurers have seen a halt to political wrangling over fundamental regulation, but for how long?

After the global financial crash, the government introduced regulation to make sure insurers did not run out of money, called Solvency II.

On 8 July 2019, several amendments to how insurers calculate their solvency capital came into force. Among these changes, a new asset class, long-term equity investment, was introduced but with a capital charge of 22%. Some see it as an opportunity for European insurers to ramp up their investment in private equity.

However, others are less convinced of the attractiveness of the change, which requires insurers to hold the equity for at least five years, and they argue insurers might want to be more tactical on their equity holdings.

The arguments around insurers’ equity holdings reveal the political nature of Solvency II regulation.

The European regulator, European Insurance and Occupational Pensions Authority (EIOPA) has historically been against lowering capital charges for equity because it thinks these investments are very volatile. Despite that, the European Commission introduced it, because of a strong political push, particularly from the European Parliament. 

The French, along with the Dutch, were the driving forces behind the change and are leading the charge to review the calibration of capital charges for insurers’ equity investment further, in the next review due to take place in 2020. 

At the end of 2019 and start of 2020, EIOPA and the insurance industry started a war of words which promised a well-fought battle during the review process.

COVID-19 has halted the regulatory process – but the battle is only delayed and not cancelled. 

You can read more about the challenges insurers face in managing their equity holdings here.