Financial Resilience and its impact on the insurance sector
Regulatory Outlook 2017
Following the BCBS's conclusion of most of its work on the risk framework early in 2017, the EU will deliberate how to adopt the new capital standards, while protecting the region's economic priorities. So what does this mean for the insurance market in 2017?
"Even though regulators are clear that overall bank capital requirements have reached their steady levels, financial resilience remains a priority, and significant policy development at the EU and national levels is still due to occur in the coming years."
Even though regulators are clear that overall bank capital requirements have reached their steady state levels, financial resilience remains a priority, and significant policy development at the EU and national levels is still due to occur in the coming years. But first, let's take a look at the current status of the EU’s adoption of elements of the Basel III framework as at December 2016:
- 7 Elements have been adopted
- 10 Elements have been covered by CRD V / CRR II or other ongoing EU initiatives
- 6 Elements are still outstanding
More developments to come
2017 will also see Internationally Active Insurance Groups (IAIGs) starting to report private data relating to the Insurance Capital Standard (“ICS”) that the FSB has asked the International Association of Insurance Supervisors (IAIS) to develop and will also see a comprehensive consultation initiated on the shape of a common supervisory framework (“ComFrame”) for international insurers, with adoption planned for 2019. In the meantime, the debate will continue as to the eventual standard’s approach to valuation and economic capital modelling, creating uncertainty for insurers in the interim as to whether, or how far, the final standard will replicate Solvency II and hence align risk management approaches and incentives between the two regimes.
Irene Geeve-Pezier shares her vision on financial resilience within the Dutch insurance sector
The entire insurance sector faces increased challenges. Profits in the individual life insurance market are under pressure from low interest rates and low revenues. Collective life insurers further have to compete with alternative providers including the Dutch ‘premiepensioeninstelling’ (PPI) and the general pension funds (APF). The general insurance market is under pressure from increased domestic and foreign competition, climate risk and uncertainty about the consequences of technological innovation. Health insurers are eating into their financial buffers in an effort to reduce increasing premiums.
Insurers with long-term obligations will not only be judged by DNB with regards to Solvency II calculations but also in terms of a more economic valuation. This measure is necessary given the increasing divergence between the financial market interest rates and the Solvency II interest rates in recent years. In addition, due to increased concerns with the non-life sector, DNB will carry out stress tests to assess adequate resilience. The objective is to gain a better understanding of the risks faced by the general insurance sector (for example natural catastrophe risks) and reinsurance risks.
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