IMF technical note on insurance, investment firm and macroprudential oversight

In July, the IMF released a technical note on insurance, investment firms and macroprudential oversight for the euro area.

http://www.imf.org/~/media/Files/Publications/CR/2018/cr18230.ashx

The note makes a series of recommendations on EU insurance regulation, supervision and macroprudential policy and provides supporting analysis for these.
The secretariat of Insurance Europe has reviewed the note and believes the IMF analysis and recommendations are favourable to EIOPA’s positions on a number of topics.

Relevant highlights and recommendations

Regulatory structure

  • Although EIOPA has increased responsibilities and duties over recent years, the allocation of additional budget and staff has not fully matched these tasks.
  • EIOPA faces budget constraints and stiff competition in attracting qualified professionals.

Risks

  • Low-interest rates remain key risk and managing back books of guaranteed products is challenging.
  • Evidence of a search for yield.
  • However, a sharp increase in interest rates could also be problematic – this is being assessed as part of 2018 stress tests.

Insurance regulation

  • For standard formula users, 60% of undiversified SCR is market risk, 30% is underwriting risks.
  • EIOPA has started to benchmark internal models.
    • EIOPA analysis suggests that using dynamic VA reduces credit risk SCR by around 50%.
  • Only 3 NCAs have used capital add-ons from Pillar 2 (FR, IE, NL) which increases SCR by less than 1% (nb – it is not clear if this is at euro area level or for each individual market).
  • SFCR serves two purposes: 1) main part is for market analysts; 2) summary should be understandable by average policyholder.
    • Market participants note that SFCR is not fit for purpose:
      • Information for analysts is available elsewhere;
      • Summary is too complex for policyholders.
      • Although SII does not include explicit macroprudential measures, both EIOPA and ERSB are reviewing this area at present.

IMF recommendations:
1. Legislators incorporate borrower-based instrument like limits to loan-to-value and “debt-service-to-income” in SII for mortgage lending.
2. Establish a harmonised framework for recovery and resolution including a more harmonised approach towards insurance guarantee schemes.

LTG measures and transitionals

  • EIOPA updated the UFR methodology and demonstrated that the impact is fairly limited – a reduction of 0.5% averages only a 6% point fall in SCR ratios.
  • Supervisory approval for VA in the euro area is required by Estonia, Germany, Ireland, Portugal and Slovenia.
  • Potential problems from VA could arise where there is significant basis risk between asset portfolio and reference portfolio.
  • Symmetric equity adjustment helps in reducing procyclical behaviour.

IMF recommendations:
1. EIOPA should explore methods for transforming the LTG measures into more symmetric measures, ie. should be designed to “build up additional reserves in good times”.
2. Public disclosure on use of LTG measures should be improved.

Review of SII

  • Capital requirement for interest rate risk is not effective when rates are low.
    • EIOPA proposal is supported by most stakeholders but calibration is disputed with industry.
    • The impact of EIOPA proposals “has been assessed with due care”.
  • Divergences between practices in calculation of LAC DT exist.

IMF recommendations:
1. Legislators should address interest rate risk.
2. Legislators should harmonise the application of the LAC DT calculations.

Insurance supervision

  • EIOPA supports NCAs in delivering high-quality supervision.
  • EIOPA is investigating on cross-border issues and a notable achievement has been the development of cooperation platforms.
  • EC has proposed several measures to strengthen the powers and governance framework of the ESAs.

IMF recommendations:
1. Legislators should endow EIOPA with the necessary powers and resources to promote further convergence.
2. EIOPA should intensify work on:

a. Internal models (in particular, more convergence on the use of DVA)
b. LAC DT – further guidance and benchmarking
c. Use of Pillar 2 capital requirements – EIOPA should issue more guidance on cases where capital add-ons should be required
d. Cyber risks

3. EIOPA should make data more accessible to NCAs/ESRB/ECB through a virtual platform to cut down on ad-hoc requests to EIOPA.