Loosening the Grip: Anticipated Capital Reliefs for German Insurers - Brussels Pushes for Investment Boost
Adapting to the New Normal
Insurance entities perceive amplified hazards in their clientele
Insurance bigwigs in Germany might be sailing through precarious waters, as per GDV CEO Jörg Asmussen. At a conference in his association's regulation domain in Berlin, he flagged currency and cyber risks, as well as rising public debt, as formidable challenges for the financial sector. But, according to him, insurers have the wherewithal to weather these global perils due to their robust capital standing.
Soaking Up Challenges
These global perils notwithstanding, Asmussen asserted that insurers can navigate these hurdles. This resilience, he explained, stems from the strong financial fortitude of insurance providers.
Leveraging Capital Reliefs
As part of the Solvency II review process, capital reliefs for the German insurance sector are in the pipeline. These reliefs aim to soften the rigid capital requirements under the present framework, encouraging more targeted and proportionate regulation.
Capital Relief Measures
This proposed capital relief strategy involves various measures to lessen the Solvency Capital Requirement (SCR) for certain risk exposures, ultimately reducing the capital insurance companies need to set aside.
Cautious Approach
Regulatory bodies, such as BaFin (Germany's Federal Financial Supervisory Authority), have expressed concerns over excessive capital relief. BaFin's head, Julia Wiens, has warned that excessive relaxation could undermine insurer resilience.
The European Parliament and European Insurance and Occupational Pensions Authority (EIOPA) share these reservations, stating that excessive capital relief could escalate systemic risk across the sector and trigger over-distribution of dividends potentially weakening financial stability.
Shifting the Focus
Besides alleviating the SCR, the review also explores removing or modifying conservative elements within the standard formula and introducing risk-sensitive approaches. This change could provide German insurers more flexibility in determining capital requirements, notably via the application of internal models.
Investment Pointer
Brussels and European policymakers view these capital reliefs as a golden opportunity to mobilize insurers' capital toward increased investments, specifically in the European economy. The reform ambitions to align capital requirements more closely with actual risks and the economic environment, incentivizing insurers to commit more funds to sectors supporting economic growth, including green and sustainable assets.
However, some experts and regulators suggest that the Solvency II revisions may not fully address insurers’ collective issues regarding climate and sustainability risks, potentially capping the scope and impact of investment incentives.
Brussels’ strategy exemplifies a broader EU agenda to capitalize on institutional investment from insurers as a primary funding source for the green transition and economic development, using capital relief to spur this transformation.
The capital reliefs proposed for the German insurance sector, as part of the Solvency II review, aim to encourage more targeted and proportionate regulation in the banking-and-insurance industry. EU policymakers view this as a means to mobilize more investments by insurers into the European finance sector, particularly in the economy and green and sustainable assets.
Despite the concerns of regulatory bodies regarding excessive capital relief and its potential impact on financial stability, the proposed review also seeks to provide insurers more flexibility in determining capital requirements, potentially through the application of internal models.
