With the 2018 review of Solvency II now done and dusted, eyes are turning to the 2020 review and what changes might emerge around the volatility adjustment (VA) and matching adjustment (MA) rules.
The VA and MA are two important mechanisms that allow life insurers to invest in assets for the long term without exposing themselves to short-term market volatility.
Massimo Di Tria, chief investment officer at Cattolica Assicurazioni says since its inception, Solvency II has contributed to establishing a strong and consistent risk management culture within the European insurance industry but “now, it is time to re-calibrate models and rules based on the lessons learnt in the last years”.
“In particular, there is room for lowering the risk charges of real assets such as equity and private equity as well as re-designing MA as well as VA rules to make them applicable and effective,” he says. “I believe many of these changes will happen, maybe even before 2020.”
Beyond Solvency II, Di Tria says there is room to harmonise the fiscal treatment of investment returns within Europe.
“Moreover, accounting standards need to be consistent with Solvency II itself; a good example to mention is the upcoming change of IFRS 9 and 17 which could have a huge impact on the investment decisions within the insurance industry,” he says.
Andrew Stoker, chief financial officer at Rothesay Life, says he has no particular expectations of the Solvency II 2020 review but hopes the long-term guarantee measures remains unchanged following the review. “[These rules] are important if we are to continue offering affordable annuities.”
He says he would also like to see a relaxation of the MA rules, for example allowing some variability of asset cash-flows as the current rules make it difficult for companies to invest in new asset classes and provide artificial constraints on the investment approaches of insurers.
ESG integration
One of the question on the table is whether to integrate environmental, social and governance (ESG) factors in the Solvency II capital charges in order to favour sustainable investments.
“I am not convinced that integration is necessarily the best approach,” Stoker says. The UK Prudential Regulation Authority has set out an approach to enhancing the management of financial risks from climate change, in a supervisory statement (SS3/19). “I believe that this is a sensible way forward,” he adds.
Sustainability works only if it is consistent across industries, Di Tria adds. “Therefore, Solvency II should consider it as a long-term risk management tool, but should also avoid to create new frameworks. An alignment with other regulations even within other industries would be a good contribution to the topic.”
Di Tria and Stoker will discuss their views on creating a regulatory and policy environment that supports long-term insurance at Insurance Asset Risk EMEA 2019 conference held in London on the 12 June.
Tomorrow’s regulation
Asked what message or takeaway they wanted to give the audience, Di Tria says: “The art of investment management goes well beyond asset management, therefore liability features, economic environment, risk, appetite, accounting rules and regulatory changes need to be understood and managed as an ecosystem to identify the best investment strategy for each and every specific portfolio.”
While Stoker says: “A stable and predictable regulatory and political environment facilitates long-term investment. The industry has spent significant time and effort in complying with Solvency II so we are not now looking for radical changes to the solvency regime.”
The conference will also showcase investment leaders discussing investment strategy in the context of emerging risk. More information on the conference can be found here.