Macro-prudential tools [EU]
The European Commission’s proposals cover:
Article 45 (Own Risk and Solvency Assessment) is amended to include macroeconomic considerations and analysis by insurers. Insurers will be required to assess the impact of plausible macroeconomic and financial market developments, including adverse economic scenarios, on their specific risk profile, business decisions and solvency needs, and reciprocally how their activities may affect market drivers. Supervisory authorities will be required to provide input to specific undertakings, particularly as regards macroprudential risks and concerns arising from their analysis.
Amendments to Article 132 (Prudent person principle) include macroeconomic considerations for investments. Insurers will be required to factor plausible macroeconomic and financial markets’ developments into their investment strategy and assess the extent to which their investments may increase systemic risk. Supervisory authorities will be required to provide input to specific undertakings as regards particular macroprudential concerns.
A new Chapter VIIA is added to the Directive to cover Macroprudential tools. These are set out in new Articles 144a to 144c. Article 144a (Liquidity risk management) introduces requirements on liquidity management and planning to ensure the ability to settle financial obligations towards policyholders. Notably, insurers will have to develop liquidity risk indicators to monitor liquidity risk.
Article 144b (Supervisory powers to remedy liquidity vulnerabilities in exceptional circumstances) enables supervisory authorities to intervene where liquidity vulnerabilities are not appropriately addressed by an insurer. In addition, supervisory authorities will have the possibility, in exceptional situations and as a last resort measure, to impose on individual companies or the entire market temporary freezes on redemption options on life insurance policies.
Article 144c (Supervisory measures to preserve the financial position of undertakings during exceptional market-wide shocks) introduces supervisory powers aiming to preserve the solvency position of specific undertakings during exceptional situations such as adverse economic or market events affecting large part or the whole insurance market. Subject to risk-based criteria and specific safeguards, distributions to shareholders and other subordinated lenders of a given undertaking can be suspended or restricted before an actual breach of the Solvency Capital Requirement.