The Central Bank published a National Report on the Long-Term Guarantee Impact Assessment (the “National Report”) which provides key messages from the Central Bank in relation to its impact assessment (carried out between late January and late March 2013) of the long-term guarantee measures proposed under Solvency II.
Key areas of the National Report are as follows:
- Matching Adjustment - The matching adjustment, within the draft proposals, is restricted to both domestic business and direct insurers. The non-applicability of the measures to cross-border business represents a clear disadvantage for undertakings selling cross-border business. The non-applicability of the measures to reinsurers places them at an economic disadvantage to direct writers. This is not consistent with maximum harmonisation and the freedom of establishment or freedom of services.
- Ring Fenced Funds - Under the draft proposals, the matching adjustment can only be applied within ring fenced funds. The Central Bank notes that there may be an unintended consequence of requiring the use of ring fenced funds in this instance through a loss of diversification benefit between mortality and longevity risk. It takes the view that this diversification benefit should be preserved and this can be achieved by establishing requirements for asset liability matching that do not require legal ring fencing.
- Transitional Measures - Under the draft proposals, the transitional measures are restricted to both domestic business and direct insurers. This raises the same concerns as the matching adjustment.
- Extrapolation - A discount rate yield curve which is not market consistent may cause a problem for insurers/reinsurers who hedge their liabilities. The measures contained in the proposals represent a move away from market consistency and may mean reduced transparency around the costs of guarantees provided over the longer term. The Central Bank favours a longer extrapolation period.
- Member State Options - Measures that are subject to Member State option may mean they are not permitted by all Member States, therefore creating an arbitrage potential within the sector. Again this is not consistent with maximum harmonisation.
Please click here to view the full text of the National Report.