EIOPA: Potential macroprudential tools and measures to enhance the current insurance regulatory framework

The European Insurance and Occupational Pensions Authority (EIOPA) initiated in 2017 the publication of a series of papers on systemic risk and macroprudential policy in insurance. So far, most of the discussions concerning macroprudential policy have focused on the banking sector. The aim of EIOPA is to contribute to the debate, whilst taking into consideration the specific nature of the insurance business.

With this purpose, EIOPA has followed a step-by-step approach, seeking to address the following questions:

  • Does insurance create or amplify systemic risk?
  • If yes, what are the tools already existing in the current framework, and how do they contribute to mitigate the sources of systemic risk?
  • Are other tools needed and, if yes, which ones could be promoted?

While the two first questions were addressed in previous papers, the purpose of the present paper is to identify, classify and provide a preliminary assessment of potential additional tools and measures to enhance the current framework in the EU from a macroprudential perspective.

EIOPA carried out an analysis focusing on four categories of tools:

  1. Capital and reserving-based tools;
  2. Liquidity-based tools;
  3. Exposure-based tools; and
  4. Pre-emptive planning.

EIOPA also considers whether the tools should be used for enhanced reporting and monitoring or as intervention power. Following this preliminary analysis, EIOPA concludes the following (Table 1):

Table 1 Macro

It is important to stress that the paper essentially focuses on whether a specific instrument should or should not be further considered. This is an important aspect in light of future work in the context of the Solvency II review. As such, this work should be understood as a first step of the process and not as a formal proposal yet. Furthermore, EIOPA is aware that the implementation of tools also has important challenges. In this respect this report provides an overview of tools, main conclusions and observations, stressing also the main challenges.

Table 2 puts together the findings of all three papers published by EIOPA by linking

  1. sources of systemic risk and operational objectives (first paper),
  2. tools already available in the current framework (second paper)
  3. and other potential tools and measures to be further considered (current paper).

Table 2 Papers

The first paper, ‘Systemic risk and macroprudential policy in insurance’ aimed at identifying and analysing the sources of systemic risk in insurance from a conceptual point of view and at developing a macroprudential framework specifically designed for the insurance sector.

The second paper, ‘Solvency II tools with macroprudential impact’, identified, classified and provided a preliminary assessment of the tools or measures already existing within the Solvency II framework, which could mitigate any of the sources of systemic risk.

This third paper carries out an initial assessment of potential tools or measures to be included in a macroprudential framework designed for insurers, in order to mitigate the sources of systemic risk and contribute to the achievement of the operational objectives.

It covers six main issues:

  1. Identification of potential new instruments/measures. The tools will be grouped according to the following blocks:
    • Capital and reserving-based tools
    • Liquidity-based tools
    • Exposure-based tools
    • Pre-emptive planning
  2. Way in which the tools in each block contribute to achieving one or more of the operational objectives identified in previous papers.
  3. Interaction with Solvency II.
  4. Individual description of all the tools identified for each of the blocks. The following classification will be considered:
    • Enhanced reporting and monitoring tools and measures. They provide supervisors and other authorities with additional relevant information about potential risks and vulnerabilities that are or could be building up in the system. Authorities could then implement an array of measures to address them both at micro and macroprudential level (see annex for an inventory of powers potentially available to national supervisory authorities (NSAs)).
    • Intervention powers. These powers are currently not available as macroprudential tools. They are more intrusive and intervene more severely in the management of the companies. Examples could be additional buffers, limits or restrictions. They are only justified where the existing measures may not suffice to address the sources of systemic risk identified.
  5. Preliminary analysis per tool.
  6. Preliminary conclusion.

Four initial remarks should be made.

  1. First, although in several instances the measures and instruments are originally microprudential in nature, they could also be implemented as macroprudential instruments, if a systemically important institution or set of institutions or the whole market are targeted.
  2. Secondly, analysing potential changes on the long-term guarantees (LTG) measures and measures on equity risk that were introduced in the Solvency II directive, although out of the scope of this paper, could contribute to further enhance the framework from a macroprudential perspective. The focus of this paper is essentially on new tools, leaving aside the analysis of potential changes in the current LTG measures and measures on equity risk, which will be carried out in the context of the Solvency II review by 1 January 2021.
  3. Thirdly, when used as a macroprudential tool, the decision process may differ, given that there are different institutional models for the implementation of macroprudential policies across EU countries, in some cases involving different parties (e.g. ministries, supervisors, etc.). This paper seeks to adopt a neutral approach by referring to the concept of the ‘relevant authority in charge of the macroprudential authority’, which should encompass the different institutional models existing across jurisdictions.
  4. Fourthly, there seems to be no single solution when it comes to the level of application of each tool (single vs. group level).

Concerning the different proposed monitoring tools, in the follow-up work, the structure and content of the additional data requirements should be defined. This should then be followed by an assessment of the potential burden of collecting this information from undertakings.

It is important to stress that this paper essentially focuses on whether a specific instrument should or should not be further considered. This is an important aspect in light of future work in the context of the Solvency II review. As such, this work should be understood as a first step of the process and not as a formal proposal yet.

Figure ORSA

Click here to access EIOPA’s detailed discussion paper

EIOPA Risk Dashboard January 2018

Risks originating from the macroeconomic environment remained stable and high. Improvements have been observed across most indicators, but were not sufficient to change the overall risk picture. The improving prospects for economic growth still contrast with the persistence of structural imbalances, such as fiscal deficit. The accommodative stance of monetary policy has been reduced only very gradually, with low interest rates continuing to put a strain on the insurance sector.

Credit risks remained constant at a medium level whereas observed spreads continued to decline. The average rating of investments has seen some marginal improvements. Concerns on the pricing of the risk premia remain.

Market risks remained stable at a medium level despite a reduction of the volatility on prices was observed. Only price to book value of European stocks moved in the direction of risk increase.

Liquidity and funding risks were constant at a medium level in 2017 Q3 and remained a minor issue for insurers. Catastrophe bond issuance significantly decreased when compared to the record high registered during the previous quarter. The low volume of issued bonds made the indicator less relevant.

Profitability and solvency risks remained stable at a medium level. A deterioration of the net combined ratio was observed in the tail (90 percentile) of the distribution mainly populated by reinsurers in this quarter. SCR ratios have improved across all types of insurers mainly due to an increase of the Eligible Own Funds. This has been especially marked for life solo companies.

Interlinkages & imbalances: Risks in this category remained constant at a medium level. Investment exposures to banks and other insurers increased slightly from the previous quarter.

Insurance risks increased when compared to 2017 Q2 and are now at a medium level. This was essentially driven by the significant increase in the catastrophe loss ratio resulting from the impact of the catastrophic events observed in Q3 mainly on reinsurers’ technical results. This is also reflected in the loss ratio. Other indicators in this risk category still point to a stable risk exposure.

Market perceptions remained constant, with the improvement in external rating outlooks outweighing the observed increase in price to earnings ratios. Insurance stocks slightly outperformed the market, especially for life insurance, and CDS spreads reduced.

Riskdashboard 12018

Click here to access EIOPA’s Risk Dashboard January 2018

How to successfully mitigate your organization’s third-party risk

What Is Third-Party Risk Management & Third-Party Due Diligence?

Third-party risk management is the process of assessing and controlling reputational, financial and legal risks to your organization posed by parties outside your organization. Third-party due diligence is the investigative process by which a third party is reviewed to determine any potential concerns involving legal, financial or reputational risks. Due diligence is disciplined activity that includes reviewing, monitoring and managing communication over the entire vendor engagement life cycle.

The Risks Are Real

As we see in the news too often, lapses in leadership around managing third parties have damaged organizations by exposing them to massive fines and penalties. According to the 2016 Benchmark Report, one-third of respondent organizations have faced legal or regulatory issues that involved third parties, with 50 percent of these involving average costs per incident of $10,000 or more. Even if the financial penalty can be managed, the reputational impact can have far-reaching consequences for many years. Third-party risk management is a top concern of compliance leaders, but many organizations are still coming to terms with how best to manage their third parties to limit risk and develop programs based on organizational risk assessments. The 2016 NAVEX Global benchmark report found that many organizations think they could be doing a better job of third-party risk management. Only 58 percent reported that they do a good job of complying with laws and regulations, and less than 25 percent rate their overall program as Good. Organizations may be diligent with their ethics and compliance programs, but for many the risk their third parties represent is a Wild West over which they feel like they have little control.

Benefits of a Strong Third-Party Risk Management Program

Managing third-party risk can make a big difference inhow well your organization can identify, manage and limit the liability a third party can represent. Your third party’s risk is your risk. You should have confidence that your program is minimizing that risk for you and your organization.

TPRClick here to access NAVEX detailed guide