On 21 March 2018, EIOPA published a paper on Solvency II tools with macroprudential impact.

The paper is the second in a series of papers with the aim of contributing to the debate on systemic risk and macroprudential policy. The purpose of the paper is to identify, classify and provide a preliminary assessment of the tools or measures already existing within the Solvency II framework, which could mitigate any of the systemic risk sources that were identified in the first paper in the series, on systemic risk and macroprudential policy in insurance, which was published in February 2018.

EIOPA says that the tools with macroprudential impact that are identified and analysed in this latest paper are the long-term guarantees measures and measures on equity risk introduced in the Solvency II Directive. These tools are the following:

  • symmetric adjustment in the equity risk module;
  • volatility adjustment;
  • matching adjustment;
  • extension of the recovery period;
  • transitional measure on technical provisions.

The paper also considers a measure allowing authorities to prohibit or restrict certain types of financial activities. This measure, which is not part of Solvency II, is included because it pursues similar objectives and also applies EU-wide.

EIOPA's preliminary assessment is that, in addition to ensuring sufficient loss absorbency capacity and reserving, the Solvency II tools identified contribute to another operational objective, that is, limiting procyclicality. The tools seek to address the risk of collective behaviour by insurers that may exacerbate market price movements, although the tools may also have limitations from a macroprudential perspective. The paper also includes a detained annex on the macroprudential impact of some of the long-term guarantees measures under stress.

EIOPA says that Solvency II has other elements with indirect macroprudential impact that should not be ignored. These instruments, which were not primarily designed as instruments to mitigate systemic risk, could nevertheless contribute to a certain extent to other operational objectives when considered at an aggregated level. The main ones are the prudent person principle, the own risk and solvency assessment and the capital add-on under specific circumstances. These tools are not analysed in this paper. They will however be taken into account when analysing potential new tools in the next paper in the series.