## 1eurea2025005 ## Source details **Canonical URL:** [1eurea2025005](https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1eurea2025005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1eurea2025005.pdf.json) --- ### Institutional evolution and EIOPA’s expanding role - Insurance supervision remains a national responsibility; EIOPA is assuming a growing, central role with new responsibilities under: - Digital Operational Resilience Act (DORA) (oversight framework for critical ICT); - Insurance Recovery and Resolution Directive (IRRD) (establishing a resolution committee and more permanent tasks, including participation in resolution colleges). - Information in this note is current as of November 18, 2024. - Recommendation: - Consider endowing EIOPA with emergency powers to take binding decisions when home NCAs are unwilling or unable to act and policyholder protection is at risk in cross-border activities (Medium Term). ### Solvency II: performance, objectives, calibration, and reforms - Performance and calibration: - Solvency II is a risk-based regime; EA insurance groups are generally well capitalized. - The standard formula is calibrated to a 99.5 percent value at risk over a one-year period. - SCR ratios have been relatively stable during market turmoil and the pandemic despite rapid interest rate changes. - Legislative process and impacts: - Solvency II Review objectives include: incentivize long-term investment, improve risk-sensitivity, mitigate excessive short-term volatility, enhance supervisory quality and coordination, and better address systemic risk. - Impact estimates (based on year end 2019 figures): - ECON Committee changes would add over EUR 120 billion to the surplus capital over SCR for the EEA insurers compared to EIOPA’s opinion. - The EC’s initial proposal following EIOPA’s opinion would have created an addition of EUR 56 billion to the surplus. - These compare to approximately EUR 972 billion in surplus and EUR 606 billion in SCR as at the end of 2019. - Amending Directive published in the Official Journal of the European Union on January 8, 2025; entered into force on January 28, 2025; MS have two years to incorporate it. - Recommendations on calibration and objectives: - If quantitative adjustments are introduced in Solvency II, changes should be considered in line with the calibration of 99.5 percent value at risk over a one-year period (Medium Term). - Legislation should make clear that the prudential objective should be the primary objective and other objectives secondary (Immediate). ### Insurance Recovery and Resolution Directive (IRRD) and Insurance Guarantee Schemes (IGS) - Pre-IRRD fragmentation: - Recovery and resolution arrangements were fragmented and dependent on national law prior to IRRD. - EIOPA database (as of August 2024): 261 failures, near misses, and ongoing uncertain cases; from 2013 to 2023: 146 cases (47 failures, 78 near misses, 21 ongoing). - IRRD features and implementation: - IRRD adopted by European Parliament April 2024, corrigendum October 2024; European Council approved November 2024. - IRRD published January 8, 2025; entered into force January 28, 2025; MS have two years for transposition. - IRRD requires EIOPA to develop 19 instruments: 12 technical standards, 6 guidelines, and a framework for cooperation agreements with staggered deadlines (18, 24, 30 months). - Implementation risk: dependence on EIOPA resources may compromise timeliness; many instruments are due close to or after IRRD application date. - Insurance Guarantee Schemes (IGS) status and cross-border principles: - IGS do not exist in all MS and designs differ materially where they do. - EIOPA information on principles in practice: - Nine IGSs follow the host-country principle. - Seven IGSs adhere to the home-country principle. - Eight IGSs employ a combined approach. - Host-country principle: covers domestic policies and inward FoS/FoE sales; does not extend to outward sales. - Home-country principle: covers domestic insurer policies both within country and outward; does not cover inward sales. - Recommendation: - Implement a minimum harmonization framework for IGS across MS to protect policyholders, particularly cross-border purchasers (Immediate / Medium Term). ### Retail Investment Strategy (RIS) and legislative fatigue - RIS objectives and proposed measures: - Strengthen framework for retail investors to make informed decisions; proposed measures include European value for money benchmarks, clearer digital information, more information on investment progress, stronger rules against misleading marketing and “finfluencers”. - Legislative progress and concerns: - Commission’s legislative proposal published May 2023; EP and Council negotiating mandates in April–June 2024. - Co-legislators proposed removing partial inducement ban and downgrading mandatory EU-wide value for money benchmarks to a supervisory tool. - EIOPA and ESMA raised concerns about resource implications (database, online comparison tool, consumer testing). - Recommendation: - Consider a temporary pause in further legislative reform after RIS implementation and IGS harmonization; set a high bar for further reforms to allow full implementation by insurers, EIOPA, and NCAs. ### EIOPA resources, staffing, and recruitment - Structural overview and current staffing: - EIOPA establishment: 220 FTEs; employed: 184 FTEs. - Seconded National Experts (SNEs) in establishment: 29; filled: 13. - ESAs funding split: NCAs 60 percent; EU 40 percent. - EIOPA annual budget has increased by about 2 percent annually. - Resource pressures and new permanent tasks: - New tasks: Solvency II review, IRRD, DORA development and implementation, RIS, SFDR, Corporate Sustainability Reporting Directive, AI Act follow-up, IFRS 17/IFRS 9 implementation implications. - EIOPA has deprioritized and scaled down activities to accommodate heavier workloads. - DORA: applicability date 17 January 2025; ESAs to receive 10 full time equivalent positions each for CTTP oversight; DORA fee collection and recruitment scheduled to begin October 2025. - Recommendations (timing categories preserved as in source): - Explore additional and new ways to recruit a full complement of staff at EIOPA (Immediate). - NCAs should ensure national seconded expert positions at EIOPA are filled (Immediate). - Review EIOPA’s budget and staff establishment plan in light of significant permanent tasks; explore other funding mechanisms (Immediate / Short Term). ### Supervisory convergence, cross-border supervision, and emergency powers - Cross-border trends and tools: - Cross-border services provision roughly doubled since Solvency II introduction in 2016. - Cross Border Notification tool launched February 2023. - Collaboration platforms since 2017: 21 Type 1 platforms; 5 Type 2 platforms. - Limits to current framework: - EIOPA lacks powers to compel a home NCA; enforcement path can involve Article 16/17 procedures and EC formal opinions; example case: NCA withdrew authorization June 5, 2023; EC initiated infringement procedure (ongoing). - Solvency II review changes: - From 2027 EIOPA will have a formal mediation role when NCAs in a collaboration platform disagree. - Where NCAs disagree about information sharing EIOPA may publish findings, recommendations or measures, including potentially the undertaking’s name. - Solvency II cross-border threshold: EUR 15 million (total cross-border gross written premium in host MS or relevant host activity as defined in RTS). - Recommendation: - Consider endowing EIOPA with emergency powers to take binding decisions when home NCAs are unwilling or unable to act and policyholder protection is at risk (Medium Term). ### Internal models and supervisory powers - Usage and findings: - At year end 2023: four insurance groups and 82 solo undertakings using approved full internal models; 27 insurance groups and 66 solo insurers using a partial internal model. - Insurers representing more than 50 percent of the European insurance market use an internal model. - Internal models generally produce SCRs lower than the standard formula, with wide variety of results for insurers of the same type. - Supervisory convergence constraints: - EIOPA undertakes country visits (two per year average: 1 in 2020, 3 in 2021, 3 in 2022, 2 in 2023, 2 in 2024); at this rate it would take nearly ten years to visit all NCAs. - EIOPA access to insurer-specific information is limited and often depends on NCAs’ goodwill; EIOPA does not have automatic access to ORSA reports. - No mechanism currently resolves differences of opinion between EIOPA staff and NCAs on internal model supervision. - Recommendations: - Obtain more resources so EIOPA can improve convergence of internal model supervision by undertaking more country visits, enhancing participation in colleges, and providing comparative studies or technical assistance (Short Term). - Give stronger powers to EIOPA on supervisory decisions related to internal models (Short Term). - Introduce a mechanism to allow a binding technical review to resolve differences of opinion between EIOPA staff and NCAs on internal model supervision (Short Term). - Discuss application of a floor to address some aspects of internal model SCR calculations (Short Term), noting analogous BCBS approach for banks. ### Macroprudential framework, stress tests, and data centralization - SRAF and systemic monitoring: - EIOPA should continue developing its European Systemic Risk Assessment Framework (SRAF); current alignment with IAIS GME lacks: - a systemic risk score for individual insurers; and - an outward-looking dimension assessing insurers’ potential systemic impact on the wider financial system. - Recommendations: - Enhance SRAF with a scoring methodology to monitor individual insurers over time from a systemic perspective and develop an approach to considering outward risks posed by insurers to other parts of the financial system (Medium Term). - Individual insurer results of stress test exercises should be published (Short Term). - Data collection and publication: - Current Solvency II data is received by NCAs and then shared with EIOPA; NCA data ownership can constrain sharing for systemic risk monitoring. - Recommendations: - Change responsibilities so EIOPA is the direct recipient of data from insurers and groups and enable NCAs to access that data; provide EIOPA adequate resources for this new responsibility (Short Term). - Individual insurance level data should be made available to the public, either as an EIOPA initiative or as part of wider initiatives such as the European Single Access Point (ESAP) (Short Term). - Align EIOPA regulation (1094/2010) to the provisions on the power to publish individual results of sectorial stress tests included in the EBA regulation (1093/2010, Article 22(1a)) (Short Term). - EIOPA and NCAs should operationalize processes to enable publication of individual insurer stress test results according to applicable regulation(s) at both National and EU level (Short Term). ### Market structure, key market statistics, and vulnerabilities (selected exact figures) - Market structure and concentration: - Insurance penetration: 9.9 percent (EA, 2023). - US insurance penetration (Swiss Re Sigma): 10 percent. - Top 10 life insurance groups account for 46 percent of the life insurance market. - Top 10 non-life insurers account for 35.8 percent of the non-life insurance market. - No insurance group has more than a 10 percent share of its relevant market at the EA level. - 14 EA MS have top 5 life insurer market share above 60 percent. - Cross-border business: - Total direct cross-border (excluding reinsurance) business reported: Euro 104.1 billion. - Asset exposures and liquidity: - Average exposure of insurers to banks: 13 percent of total investments (2023). - Liquid assets ratio weighted median: 48 percent (end 2023). - Real estate exposures: 10.3 percent of total investments (end 2023); 7.3 percent (end 2016). - Alternative assets: 16 percent of assets (end 2023). - Life insurers’ allocation to alternative assets: 23.6 percent of investments; to real estate: 10.5 percent. - Transitional measures and volatility adjustment (VA): - Cumulative SCR ratio of insurers using transitional measures on technical provisions: 263 percent (end 2023); without transitional measures: 249 percent. - SCR for insurers using VA: 263 percent (end 2023); if VA = 0 then 245 percent. - Profitability and capital quality: - Weighted median return on assets: 0.8% (second half of 2023); 0.6% (second half of previous year). - Eligible capital Tier 1 unrestricted share: 91 percent (end 2023). ### LACDT (Loss-absorbing Capacity of Deferred Taxes) - Concept and effect: - LACDT adjusts the SCR by the expected recognition of new deferred tax assets if unexpected losses occur. - LACDT can lead to material reductions in SCR and varies significantly across EA countries. - Key uncertainty: - Value of deferred taxes depends on future profits; concept overlaps with IAS 12 in IFRS. - Regulatory response: - New eligibility rules introduced in 2018; EIOPA guidance in supervisory handbook. - Supervisory implication: - Higher levels of LACDT require increased scrutiny. ### Market conduct, Product Oversight and Governance (POG), and consumer protection - Legal framework and objectives: - IDD regulates design and distribution of insurance products; IDD is mostly minimum harmonizing. - POG Delegated Regulation requires products be compatible with a defined target market and places prime importance on customers’ interests throughout product lifecycle. - Supervision and enforcement challenges: - EIOPA has increased focus on market conduct but resources remain limited. - POG peer review (reference period Q1-2008 to Q1-2022) issued 110 final recommended actions to 30 NCAs; 18 NCAs met few expectations on POG supervision. - Consumer trust and indicators: - Eurobarometer July 2024: 8 percent of EU consumers do not have any non-life insurance products. - EIOPA’s Eurobarometer 2024: 41 percent of EU consumers still do not trust insurers to ensure good consumer outcomes. - EIOPA 2022 Eurobarometer: 22 percent of consumers would not know if they were covered in a natural catastrophe; 2023: 19 percent unsure of exclusions. - Recommendation: - Provide EIOPA with more direct ability to identify, analyze and assess risks for policyholders which are relevant to multiple member states. ### Sustainable finance, climate risk, and prudential treatment - EIOPA Sustainability Unit: - Staffed by five full-time experts and part-time specialists; mandate covers climate, biodiversity, social risks and governance. - Climate risk in ORSA and Pillar I considerations: - EIOPA Opinion expects insurers to integrate climate change risk scenarios in ORSA across time horizons and assess materiality on solvency. - EIOPA published consultation paper December 2023 and report November 2024 on Prudential Treatment of Sustainability Risks. - Fossil fuel-related asset policy options: - Option 1: Maintain status quo. - Option 2: Differentiate within existing frameworks — treat fossil fuel-related equities as Type II equity (capital charge 49 percent rather than 39 percent for Type I) and apply rating downgrade for related bonds. - Option 3: Dedicated supplementary capital requirement — for fossil fuel-related equities add 17 percentage points to existing equity capital requirements; for fossil fuel-related bonds a 40 percent increase in the spread risk charge. - EIOPA’s impact assessment: proposed options have minimal effect on aggregated solvency ratio due to diversification and limited direct exposure. - Natural catastrophe reassessment: - Proposed new risk factors for 25 perils/regions across five perils (flood, hail, earthquake, windstorm, subsidence); recommend adding flood risk for nine countries including the Netherlands, Ireland and Finland. - Recommendation: - After reassessment of natural catastrophe risks in the Pillar 1 standard formula, review how internal model users are calibrating natural catastrophe risks to ensure consideration of at least the same risks as the standard formula. ### Nat Cat insurance protection gap and EIOPA initiatives - Protection gap scale: - Estimated more than EUR 900 billion in direct economic losses caused by natural catastrophes in the EEA between 1980 and 2023. - Almost a fifth of the losses over this 43-year period occurred in the last three years. - Only approximately 25 percent of these losses were insured. - Demand- and supply-side measures: - EIOPA issued Supervisory Statement on exclusions related to systemic events to promote clarity for consumers. - EIOPA conducting a small survey in eight MS on contract exclusions. - EIOPA established a “Centre of excellence for catastrophe modeling and data” to provide supervisors and insurers with expertise, tools and data and to develop uniform catastrophe risk and loss data. - Recommendations: - Improve risk awareness, simplify purchasing processes, standardize product coverage/exclusions and pricing structures to reduce the protection gap. ### Selected specific recommendations and timing categories (preserved) - Implement a formal profitability assessment with a special focus on large groups using IFRS, based on further analysis of similarities/differences between Solvency II valuation principles and IFRS (ST). - Develop a more systematic approach for targeted use of the capital add-on under Pillar 2 to address vulnerabilities in internal control, risk management, and governance (MT). - If quantitative adjustments are introduced in Solvency II, consider changes aligned with calibration of 99.5 percent value at risk over a one-year period (MT). - Ensure prudential objectives remain primary in the Solvency II review (I). - Include in RIS implementation any additional reforms on design and distribution of insurance products aimed at enhancing EU savings and investments (MT). - Consider supervisory review processes to ensure internal model users recognize additional risk charges for fossil fuel-related assets if adopted in the standard formula (MT). - Once reassessment of natural catastrophe risks in the Pillar 1 standard formula is completed, review how internal model users calibrate natural catastrophe risks to ensure consideration of at least the same risks as the standard formula (MT). Timing key: Immediate (I) within 1 year; Short Term (ST) within 1-2 years; Medium Term (MT) within 3−5 years. ### Annex II — List of National Competent Authorities (NCAs) for Insurance Supervision (selected entries preserved verbatim) - Austria — FMA - Finanzmarktaufsicht (Financial Market Authority): Prudential & market conduct - Belgium — NBB - Nationale Bank van België (National Bank of Belgium): Prudential supervision. The Financial Services and Markets Authority (FSMA) is responsible for the market conduct supervision - Croatia — Croatian Financial Services Supervisory Agency: Prudential & market conduct - Cyprus — Αρμοδιότητα της Υπηρεσίας Ελέγχου Ασφαλιστικών Εταιρειών (Cyprus Insurance Companies Control): Prudential & market conduct - Estonia — Finantsinspektsioon (Estonia Financial Supervision Authority): Prudential & market conduct - Finland — FIN-FSA - Finanssivalvonta (Finnish Financial Supervisory Authority): Prudential & market conduct - France — ACPR - Autorité de Contrôle Prudentiel et de Résolution (Prudential Control Authority): Prudential & market conduct - Germany — BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority): Prudential & market conduct - Greece — Τράπεζα της Ελλάδος (Bank of Greece - Department of Private Insurance Supervision): Prudential & market conduct - Ireland — Central Bank of Ireland: Prudential & market conduct - Italy — IVASS - Istituto per la Vigilanza sulle assicurazioni: Prudential & market conduct - Latvia — Latvijas Banka: Prudential & market conduct - Lithuania — Lietuvos Bankas (Bank of Lithuania): Prudential & market conduct - Luxembourg — Commissariat aux Assurances: Prudential & market conduct - Malta — Prudential & market conduct Prudential & market conduct - The Netherlands — DNB - De Nederlandsche Bank (National Bank of Netherlands): Prudential supervision. The Autoriteit Financiële Markten (AFM) is responsible for the market conduct supervision - Portugal — AUTORIDADE DE SUPERVISAO DE SEGUROS E DE FUNDOS DE PENSOES: Prudential & market conduct - Slovakia — NBS - Narodna Banka Slovenska (National Bank of Slovakia): Prudential & market conduct - Slovenia — AZN - Agencija za Zavarovalni Nadzor (Insurance Supervision Agency): Prudential & market conduct - Spain — Dirección General de Seguros y Fondos de Pensiones: Prudential & market conduct *Source: EXECUTIVE SUMMARY, INTRODUCTION, and selected chapters and annexes from 1eurea2025005 — International Monetary Fund (Technical Note prepared by Peter Windsor).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Institutional evolution and EIOPA’s expanding role - Over the past five years, the institutional structure for insurance regulation and supervision in the euro area (EA) has evolved incrementally; important legislative processes were in development at the time of the FSAP. - Insurance supervision remains a national responsibility, but the European Insurance and Occupational Pensions Authority (EIOPA) is assuming a growing, central role, including new responsibilities under: - the Digital Operational Resilience Act (DORA) (oversight framework for critical ICT); and - the Insurance Recovery and Resolution Directive (IRRD) (establishing a resolution committee and more permanent tasks, including participation in resolution colleges). - At the time of the FSAP, the Solvency II Review and the Retail Investment Strategy (RIS) proposal were important legislative review processes in course. - Information in this note is current as of November 18, 2024. This Technical Note was prepared by Peter Windsor (IMF, Monetary and Capital Markets Department). ### Solvency II: performance, objectives, and calibration - Solvency II is a sophisticated, risk-based solvency regime that has worked well over time; EA insurance groups are generally well capitalized. - Solvency Capital Requirement (SCR) ratios have been stable during market turmoil and the pandemic, even as interest rates increased quite quickly. - The European Commission’s objective for the Solvency II Review is to provide incentives for the insurance and reinsurance sector to invest in long-term capital while ensuring resilience. - Proposed changes to Pillar 1 requirements during the legislative process could lead to material increases in insurers’ surplus capital over the current SCR. - Recommendations on calibration and objectives: - Adjustments to quantitative requirements in Solvency II should be considered in line with the calibration of 99.5 percent value at risk over a one-year period. - The legislation should make clear that the prudential objective should be the primary objective and other objectives secondary. ### IRRD and Insurance Guarantee Schemes (IGS) - Finalization of the IRRD’s legislative process is welcomed, but it should be buttressed by harmonizing Insurance Guarantee Schemes (IGS). - Prior to IRRD, recovery and resolution arrangements depended on national law and were fragmented. - IGS do not exist in all Member States (MS) and designs differ materially where they do; such differences may pose challenges in failures of cross-border insurers. - Recommendation: Implement a minimum harmonization framework for IGS across MS to protect policyholders, particularly cross-border purchasers, and to foster greater trust in the single market. ### Retail Investment Strategy (RIS) and legislative fatigue - RIS seeks to strengthen the framework to enable retail investors to make more informed decisions, with proposed benefits such as: - European value for money benchmarks; - clearer information fit for digital distribution; - more information on investment progress; and - stronger rules against misleading marketing and “finfluencers”. - Amendments proposed by the European Parliament (EP) and Council have the potential to weaken some RIS proposals, as emphasized by EIOPA and ESMA. - There is regulatory fatigue among stakeholders due to multiple recent reforms (Solvency II changes, IRRD, DORA, Artificial Intelligence Act, Taxonomy Regulation, SFDR, Corporate Sustainability Reporting Directive, IFRS 17/IFRS 9 implementation from the beginning of 2023). - Recommendation: Consider a temporary pause in further legislative reform after RIS implementation and IGS harmonization; set a high bar for further reforms to allow full implementation by insurers, EIOPA, and NCAs. ### EIOPA resources, staffing, and recruitment - EIOPA’s resources are stretched and no additional resources were planned for its new tasks once reforms are implemented. - Over the last 5 years, EIOPA has had to deprioritize and scale down activities to accommodate heavier workloads from new regulations. - EIOPA is not recruiting to the full extent of its existing resource envelope and relies on Seconded National Experts (SNEs), which NCAs have struggled to fill due to their own resource pressures. - EIOPA faces competition for staff and challenges in attracting and retaining expertise in digitalization, sustainability, and financial supervision. - Recommendations: - Explore additional and new ways to recruit a full complement of staff at EIOPA (Immediate). - NCAs should ensure national seconded expert positions at EIOPA are filled (Immediate). - Review EIOPA’s budget and staff establishment plan in light of significant permanent tasks from legislative reform; explore other funding mechanisms (Immediate). ### Supervisory convergence, cross-border supervision, and emergency powers - EIOPA’s efforts in supervisory convergence are crucial, but cooperation between home and host supervisors remains problematic despite tools like guidelines and peer reviews. - Difficult cross-border cases have shown EIOPA and the European Commission (EC) lack sufficient authority to protect policyholders when NCAs do not fulfill Solvency II obligations. - The Solvency II Review aims to strengthen EIOPA’s cross-border supervisory role, but further enhancements are needed. - Recommendation: Consider endowing EIOPA with emergency powers to take binding decisions when home NCAs are unwilling or unable to act and policyholder protection is at risk in cross-border activities; this may require more fundamental reform of the relationship between EU authorities and MS (Medium Term). ### Internal models and supervisory powers - Insurers representing more than 50 percent of the European insurance market use an internal model to calculate the SCR. - Comparisons between SCRs calculated using internal models and those using the standard formula show a wide variety of results for insurers of the same type. - EIOPA currently undertakes activities to foster convergence in internal model supervision but faces barriers (limited resources for country visits, participation in colleges, benchmarking and technical assistance). - Recommendations: - Obtain more resources so EIOPA can improve convergence of internal model supervision by undertaking more country visits, enhancing participation in colleges, and providing more comparative studies or technical assistance (Short Term). - Give stronger powers to EIOPA on supervisory decisions related to internal models (Short Term). - Introduce a mechanism to allow a binding technical review to resolve differences of opinion between EIOPA staff and NCAs on internal model supervision (Short Term). - Enter into discussion on the application of a floor to address some aspects of internal model SCR calculations (Short Term), noting a similar approach has been taken by the BCBS for banks. ### Macroprudential framework, SRAF, stress tests, and data centralization - EIOPA should continue developing its European Systemic Risk Assessment Framework (SRAF); current alignment with the IAIS Global Monitoring Exercise (GME) lacks: - a systemic risk score for individual insurers analogous to the GME’s Individual Insurer Monitoring; and - an outward-looking dimension assessing insurers’ potential systemic impact on the wider financial system. - Recommendations: - Enhance SRAF with a scoring methodology to monitor individual insurers over time from a systemic perspective and develop an approach to considering outward risks posed by insurers to other parts of the financial system (Medium Term). - Individual insurer results of stress test exercises should be published. - Solvency II data collection should be centralized at EIOPA: - Currently, Solvency II data is received by NCAs and then shared with EIOPA; key data ownership by NCAs can constrain sharing with other ESFS members for systemic risk monitoring. - Recommendation: Change responsibilities so EIOPA is the direct recipient of data from insurers and groups and enable NCAs to access that data; provide EIOPA adequate resources for this new responsibility (Short Term). - Individual insurance level data should be made available to the public, either as an EIOPA initiative or as part of wider initiatives such as the European Single Access Point (ESAP) (Short Term). - Align EIOPA regulation (1094/2010) to the provisions on the power to publish individual results of sectorial stress tests included in the EBA regulation (1093/2010, Article 22(1a)) (Short Term). - EIOPA and NCAs should operationalize processes to enable publication of individual insurer stress test results according to applicable regulation(s) at both National and EU level (Short Term). ### Selected specific recommendations and timing categories - Implement a formal profitability assessment with a special focus on large groups using IFRS, based on further analysis of similarities/differences between Solvency II valuation principles and IFRS (ST). - Develop a more systematic approach for targeted use of the capital add-on under Pillar 2 to address vulnerabilities in internal control, risk management, and governance (MT). - If quantitative adjustments are introduced in Solvency II, consider changes aligned with calibration of 99.5 percent value at risk over a one-year period (MT). - Ensure prudential objectives remain primary in the Solvency II review (I). - Include in RIS implementation any additional reforms on design and distribution of insurance products aimed at enhancing EU savings and investments (MT). - Consider supervisory review processes to ensure internal model users recognize additional risk charges for fossil fuel-related assets if adopted in the standard formula (MT). - Once reassessment of natural catastrophe risks in the Pillar 1 standard formula is completed, review how internal model users calibrate natural catastrophe risks to ensure consideration of at least the same risks as the standard formula (MT). Timing key: Immediate (I) within 1 year; Short Term (ST) within 1-2 years; Medium Term (MT) within 3−5 years. *Source: EXECUTIVE SUMMARY, 1eurea2025005 — International Monetary Fund (Technical Note prepared by Peter Windsor).* ### INTRODUCTION ### INTRODUCTION ### Scope and Methodology - This Technical Note (TN) provides an analysis of the main elements of the regulatory and supervisory framework governing insurance companies in the EA. The analysis is based on the existing regulatory framework and supervisory practices that were in effect as of November 2024. - The analysis is informed by: - a comprehensive review of regulations and market analyses, - discussions with European and national authorities, - meetings with representatives from insurance companies and industry associations. - Recommendations are based on applicable international standards, but the TN does not assess observance of the Insurance Core Principles. - The TN focuses on EU-wide issues in prudential and market conduct regulation and supervision, and discusses macroprudential tools and crisis management within the insurance sector. - The TN covers the EA (the 20 EU countries that use the Euro) and notes that the regulatory framework is applicable in the EEA (the 27 EU MS plus Iceland, Liechtenstein, and Norway). ### Market Structure - Insurance penetration: - Insurance penetration is 9.9 percent in 2023 for the EA. - Insurance penetration varies considerably between MS; overall EA penetration compares favorably to the United States, reported at 10 percent by Swiss Re Sigma. - Number of insurers: - There has been a steady decline in the number of insurers in the EA across all types of insurers; exits have consistently exceeded entries. - Balance sheet and valuation impacts: - Both asset and liability values declined in 2023, impacted by market value changes due to the significant increase in interest rates. - The Solvency II valuation approach, particularly long-term guaranteed measures such as the volatility adjustment (VA), appears to be working well in the changed environment: asset and liability values have moved in similar ways and the SCR has been relatively stable. - Within bond portfolios, government bond values reacted most to the changed interest rate environment. - Business lines and growth: - Life insurance is an important form of savings for EA citizens; life GWP growth has been volatile. - Non-life GWP has been increasing steadily; non-life technical provisions are lower than life technical provisions due to the short-term nature of the business. - IL/UL life insurance technical provisions (Index-Linked and Unit-Linked) have not been as affected by interest rate changes as life insurance excluding IL/UL. - Market concentration: - Top 10 life insurance groups account for 46 percent of the life insurance market. - Top 10 non-life insurers account for 35.8 percent of the non-life insurance market. - No insurance group has more than a 10 percent share of its relevant market at the EA level. - At the MS level, concentration can be high: outside France and Germany, life market concentration of the top 5 insurers is significant; 14 EA MS have top 5 life insurer market share above 60 percent. - Cross-border business within the EEA: - Total direct cross-border (excluding reinsurance) business reported was Euro 104.1 billion. - Host countries with the most significant cross-border markets include Italy, France, and Germany. - Home countries dominating cross-border business include Ireland and Luxembourg. - Cross-border business can be very significant as a share of the overall insurance market in some EEA countries. - Insurer exposures to banks: - Average exposure of insurers to banks was 13 percent of total investments in 2023; exposures vary considerably by country with Estonia and Malta at the highest levels. ### Risks and Vulnerabilities of the Insurance Sector - Sources and monitoring: - EIOPA publications (quarterly insurance risk dashboard, semi-annual Financial Stability Report) and a quarterly qualitative survey among NCAs are key references for risks and vulnerabilities. - The Spring 2024 NCA survey (published in June 2024 FSR) identified the highest risks as macroeconomic risks (uncertainty around inflation and growth), linked to geopolitical instability; market risks (notably interest rate risk) were second; digitalization and cyber risks were third. - Market risk: - Market risk is the only risk identified as "high risk". - Risk premia repricing is a main uncertainty ahead; credit spreads appear tight given the economic and monetary environment. - Falling interest rates: - Increase asset values but also increase liabilities; reducing returns will negatively impact the life sector in the medium to long-term. - Interest rate hedging through derivatives can be a source of liquidity risk via margin calls if rates move unexpectedly. - Market perceptions risk increased over the last year; insurance stocks underperformed during 2023 but reversed in Q3 2024; price to earnings ratios remained stable with increased dispersion; insurer CDS spreads are declining. - Non-life risks: - Natural catastrophe risks remain a top consideration (notably flooding events) affecting insurer losses and the affordability/availability of coverage. - Claims inflation remains a concern even as headline CPI declines; claims inflation can be driven by items such as automotive parts and building materials. - Life sector lapse risk and liquidity: - Policy lapses have been rising; relatively easy financial conditions provide policyholders options to reinvest elsewhere. - Lapse risk appears in regulatory capital as higher lapse risk (e.g., mass lapse risk); EIOPA finalized a public consultation on guidance for treatment of mass-lapse reinsurance to achieve greater supervisory convergence. - Lapse levels are heterogeneous across countries and distribution models (e.g., distribution by banks correlates with higher lapse rates). - Liquidity: insurers appear to have sufficient cash flow from premiums and sufficient liquid assets to sustain higher lapse rates seen recently. - The liquid assets ratio of insurance undertakings in the EEA slightly declined since 2020; weighted median value at 48 percent at end 2023; the liquid assets ratio varies considerably across EA countries. - Real estate and alternative assets: - Total exposures to real estate investments reported at 10.3 percent of total investments at end 2023, compared to 7.3 percent at end 2016. - Alternative assets are material at 16 percent of assets at end 2023 (EIOPA’s definition of alternative assets includes real estate). - Life insurers have largest exposure to alternative assets: 23.6 percent of their investments in alternative assets and 10.5 percent in real estate. - The exposure to real estate requires ongoing monitoring according to the ESRB. - Transitional measures and volatility adjustment (VA): - Transitional measures on valuation of technical provisions affect interest rate risk calculation and can be significant in stress. - At end 2023, cumulative SCR ratio of insurers using transitional measures on technical provisions was 263 percent; without transitional measures the SCR ratio for these insurers would be 249 percent. - For insurers using the VA, SCR ratios were 263 percent at end 2023; if the VA was set to zero the SCR ratio would be 245 percent. - The VA has been successful in reducing volatility in SCR ratios and will become more significant when the Solvency II review is implemented. - Profitability and reporting: - Solvency II reporting includes limited information on the income statement; insurers report premiums, claims, expenses, and income/gains and losses as part of prudential reporting; a breakdown of profit & loss is reported in financial stability templates. - EIOPA reports profitability metrics: return on assets, return on investments, return on equity (using excess of assets over liabilities as proxy), and return to premiums. - Weighted median return on assets was 0.8% in the second half of 2023, up from 0.6% in the second half of the previous year. - Profit emergence varies by accounting methodology; groups applying IFRS 17 for consolidated group reporting are likely to have very different profit emergence than groups and solo insurers using country-specific GAAP. - Capital quality and EPIFP: - At end 2023, 91 percent of Eligible capital to meet the SCR was made up of Tier 1 unrestricted capital. - Expected profits included in future premiums (EPIFP) can be significant and differ across countries. - The SCR calculation seeks to account for circumstances in which future profits will not be realized; future profits impact Tier 1 unrestricted capital through a reduction in technical provisions and therefore higher recognized Tier 1 capital. - High levels of embedded future profits in technical provisions warrant scrutiny of cash flow assumptions used in calculating those technical provisions. - LACDT: - Reductions in SCR for LACDT vary by insurer and by undertaking with material variations; variations among countries can be significant. ### Key Statistics and Figures Cited - Insurance penetration: 9.9 percent (EA, 2023). - US insurance penetration (Swiss Re Sigma): 10 percent. - Total direct cross-border business reported: Euro 104.1 billion. - Average exposure of insurers to banks: 13 percent of total investments (2023). - Liquid assets ratio weighted median: 48 percent (end 2023). - Real estate exposures: 10.3 percent of total investments (end 2023); 7.3 percent (end 2016). - Alternative assets: 16 percent of assets (end 2023). - Life insurers’ allocation to alternative assets: 23.6 percent of investments; to real estate: 10.5 percent. - Transitional measures users’ cumulative SCR ratio: 263 percent (end 2023); without transitional measures: 249 percent. - SCR for insurers using VA: 263 percent (end 2023); if VA = 0 then 245 percent. - Eligible capital Tier 1 unrestricted share: 91 percent (end 2023). - Weighted median return on assets: 0.8% (second half of 2023); 0.6% (second half of previous year). ### Policy Recommendation - NCAs and EIOPA should consider requiring groups applying IFRS to report an income statement to enable analysis about profitability to be conducted. *Source: INTRODUCTION — 1eurea2025005 (Technical Note), material as of November 2024.* ### 18. The Loss-absorbing Capacity of Deferred Taxes (LACDT) is open to significant ### 18. The Loss-absorbing Capacity of Deferred Taxes (LACDT) is open to significant interpretation in the SCR calculation ### LACDT: concept, uncertainty, and supervisory changes - LACDT is a Solvency II adjustment that accounts for the creation of new deferred tax assets if an insurance company experiences unexpected losses as calculated by the Basic Solvency Capital Requirement (BSCR). - Effect on SCR: - The SCR is reduced by the amount of new deferred taxes that could be recognized. - LACDT can lead to material reductions in SCR and varies significantly across EA countries. - Key uncertainty: - The value of deferred taxes requires future profits to realize their value. - The key concept and process (including the probability of future taxable profit) is commonly used in IFRS (IAS 12) in general-purpose financial statements. - Regulatory response: - New eligibility rules were introduced in 2018 limiting the circumstances in which LACDT could be recognized. - Specific guidance was developed by EIOPA in its supervisory handbook. - The changes were aimed at ensuring insurers were not being overly optimistic in setting their assumptions when projecting future taxable profits. - Supervisory implication: - Higher levels of LACDT require increased scrutiny. ### EU insurance regulation architecture and EIOPA role - Institutional evolution: - Over the past five years, the institutional structure for insurance regulation and supervision has evolved; insurance supervision remains a national responsibility but EU bodies took a greater role after the global financial crisis. - EIOPA within the ESFS: - EIOPA is part of the ESFS which includes three ESAs—the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and EIOPA—along with the ESRB. - EIOPA serves as an independent advisory body to the EC, the European Parliament, and the Council. - Scope includes insurers and reinsurers, financial conglomerates, institutions for occupational retirement provision, and insurance intermediaries. - EIOPA has legal personality, administrative and financial autonomy, and is accountable to the European Parliament and the Council of the EU. - EIOPA works closely with the NCAs; NCAs continue to supervise individual financial institutions within their MS, while EIOPA and the other ESAs aim to enhance the functioning of the internal market. - EIOPA mission statement (excerpt): - “EIOPA seeks to protect the public interest by contributing to the short-, medium- and long-term stability, effectiveness and sustainability of the financial system for the Union’s economy, citizens and businesses.“ - EIOPA’s mandate focuses on safety, soundness and financial stability, not competitiveness or supplementary objectives. - EIOPA’s five broad categories of tasks: - Consumer Protection - Regulatory Framework - Financial Stability - Advisory Role - Supervisory convergence ### Solvency II: structure, calibration, and governance - Three-pillar structure: - Quantitative Requirements: valuation of assets and liabilities (with some reliance on IFRS), capital requirements—the SCR and Minimum Capital Requirement (MCR), and own funds. - Governance: risk management and internal control systems, and the supervisory review process. - Supervisory Reporting and Public Disclosure: reporting requirements to supervisory authorities and public disclosure. - SCR calculation: - Typically calculated using the standard formula, though insurers can opt for a full or partial internal model, subject to supervisory approval. - The standard formula uses a modular approach and is calibrated to a 99.5 percent value at risk over a one-year period. - The SCR must be covered by eligible own funds; the SCR ratio (eligible own funds to SCR) should be at least 100 percent. - MCR: - The MCR is not risk-based and typically ranges between 25 and 45 percent of the SCR, subject to an absolute minimum amount. - Failure to meet the SCR: insurer must take measures to comply within six months. - Breach of the MCR: could lead to withdrawal of authorization unless rectified within three months. - Pillar II and capital add-ons (CAOs): - The ORSA report documents risks and is a key instrument for supervisors. - NCAs can prescribe a capital add-on (CAO); use is limited. - As at the end of 2023: - Total CAOs: 13 (9 member states) - Total value: EUR 297mn - Equivalent to less than one percent of the SCR. - Of the 13 CAOs: - Eight were due to differences in the insurer’s risk profile compared with standard formula SCR underlying assumptions. - One was due to deviation in the insurer’s risk profile compared to internal model SCR underlying assumptions. - Four were due to weak governance. - Pillar III: - Requires QRTs and narrative reporting to the NCA and public disclosures, including the Solvency and Financial Condition Report (SFCR). - SFCR: main part targeted at market analysts; summary part drafted for policyholders. Recommendation - EIOPA and NCA’s should develop a more systematic approach on how the CAOs can be used in a more targeted way to address vulnerabilities under Pillar 2 such as from internal control functions, risk management practices and governance processes. ### Solvency II Review: objectives, changes, and calibration concerns - EC objectives for the Review: 1. Provide incentives for insurers to contribute to the long-term sustainable financing of the economy. 2. Improve risk-sensitivity. 3. Mitigate excessive short-term volatility in insurers’ solvency positions. 4. Enhance quality, consistency and coordination of insurance supervision across the EU, and improve protection of policyholders and beneficiaries, including when their insurer fails. 5. Better address the potential build-up of systemic risk in the insurance sector. - Process and timeline highlights: - Call for Advice to EIOPA from the EC in February 2019. - EIOPA provided its Opinion in December 2020. - Two public consultations in July 2019 and October 2019. - European Commission tabled a proposal for a directive in September 2021. - Impact estimates and concerns: - Estimates during negotiations (based on year end 2019 figures): - ECON Committee changes would add over EUR 120 billion to the surplus capital over SCR for the EEA insurers compared to EIOPA’s opinion. - The EC’s initial proposal following EIOPA’s opinion would have created an addition of EUR 56 billion to the surplus. - These compare to approximately EUR 972 billion in surplus and EUR 606 billion in SCR as at the end of 2019. - These represent a significant relaxation relative to the original proposals. - Material changes affected valuation of liabilities (extrapolation of the risk-free yield curve, the VA, the risk margin in technical provisions, and the long-term equity capital requirements). - No impact assessments were available on whether proposed deviations to EIOPA’s advice would compromise the calibration of the SCR. - Solvency requirements should be developed on a total-balance sheet approach recognizing interdependence between assets, liabilities, regulatory capital requirements and capital resources. - Amending Directive: - Published in the Official Journal of the European Union on January 8, 2025. - Entered into force on January 28, 2025. - MS have two years to incorporate the Amending Directive into legislation. Recommendations - If adjustments are introduced to quantitative requirements in Solvency II, changes should be considered in line with the calibration of 99.5 percent value at risk over a one-year period. - The EC should ensure that while there may be multiple objectives to the Solvency II review, the prudential objective should be the primary objective and other objectives should be secondary. ### Insurance Recovery and Resolution Directive (IRRD) and resolution gaps - Pre-IRRD situation: - At time of mission, recovery and resolution framework for insurance companies was regulated only by national laws, resulting in considerable variations among EU MS. - Failures and near misses: - As of August 2024, EIOPA's database of failures and near misses contains a total of 261 cases (failures, near misses, and ongoing uncertain cases). - From 2013 to 2023: 146 cases reported, of which: - 47 were failures, - 78 were near misses, - 21 are still ongoing. - International resolution standards: - FSB’s Key Attributes and IAIS’ ICP 12 outline core elements needed: legal powers, funding arrangements, resolution tools, requirements for planning and cross-border cooperation. - EIOPA’s analysis revealed several gaps across different EU MS. - IRRD adoption and timeline: - European Parliament adopted the IRRD in April 2024 and a corrigendum in October 2024. - European Council approved it in November 2024. - IRRD published in the Official Journal of the European Union on January 8, 2025, and entered into force on January 28, 2025. - MS will have a two-year period to incorporate the Directive into national legislation. - The IRRD is a minimum harmonization directive allowing MS flexibility in transposition. - Pre-existing national frameworks: - Prior to IRRD, France, Romania, and the Netherlands had dedicated legislative frameworks for recovery and resolution of insurers. - Some MS possess specific powers in national laws aligned with IRRD provisions. *Source: 1eurea2025005 - 18. The Loss-absorbing Capacity of Deferred Taxes (LACDT) is open to significant* ### 38. Minimum harmonization of IGS was not included in the IRRD. A comprehensive ### 38. Minimum harmonization of IGS was not included in the IRRD. A comprehensive ### Insurance Guarantee Schemes (IGS): status, principles, and challenges - The IRRD acknowledges the role of IGS and: - allows for the use of IGS as a contributor to resolution schemes; - availability of IGS for funding can be taken into account for resolution planning; - Member states may provide that an appropriate insurance guarantee scheme is assigned with the duties and rights of a bridge undertaking provided that certain conditions are met; and - the potential use of an IGS can be taken into account when the authorities decide whether to bring a failing undertaking into resolution or wind it up under a national insolvency proceedings. - Background: - A comprehensive proposal for a minimum harmonization framework for IGS was made in the context of EIOPA’s Opinion on the 2020 Solvency II Review but was not proposed together with the IRRD. - EC position and IRRD follow-up: - In 2021, the EC acknowledged that establishing a minimum common framework for IGS would significantly enhance protection of policyholders and foster greater trust in the single market. - Given estimated implementation costs and economic uncertainty from the COVID-19 pandemic, the EC deemed it inappropriate to proceed with IGS harmonization in 2021 but indicated it would revisit appropriateness and timing in the future. - The IRRD requires the EC to submit a report within 24 months of its entry into force, after consulting with EIOPA, to assess the suitability of IGS harmonization. - Cross-border coverage issues and principles: - Host-country principle: - An IGS covers all domestic policies issued by local insurers and policies sold by foreign insurers into the country through freedom of services (FoS) or freedom of establishment (FoE) (inward). - It does not extend coverage to policies sold abroad via FoS or FoE (outward). - Result: policyholders insured by the same failed insurer may be treated differently based solely on residence. - Home-country principle: - Covers policies issued by domestic insurers both within the country and abroad via FoS or FoE (outward). - Does not provide coverage for policies sold by foreign insurers into the country through FoS or FoE (inward). - Result: policyholders within the same Member State (MS) may be supported by different national IGSs and receive varying levels of protection. - EIOPA information on principles in practice: - Nine IGSs follow the host-country principle. - Seven IGSs adhere to the home-country principle. - Eight IGSs employ a combined approach. - Consequence: - The lack of IGS in several MS, and fragmentation where IGS exist, pose challenges in failures involving cross-border operations and can leave some policyholders unprotected or with varying protection levels. ### EIOPA instruments under the IRRD: scope, timing, and implementation risk - IRRD requirements for EIOPA: - EIOPA must develop 19 instruments, which include 12 technical standards, 6 guidelines, and a framework for cooperation agreements. - Categorization of instruments (illustrative): - 1) Recovery planning - 2) Operational issues - 3) Valuation - 4) Resolution plans and resolvability - 5) Legal issues - Delivery schedule and process: - Technical materials will be produced with varying deadlines of 18, 24, and 30 months following the IRRD’s entry into force. - EIOPA has established a dedicated project group and is organizing instruments into three batches. - The batches are not fully aligned with the delivery deadlines; some instruments have important linkages to other instruments. - The first batch of technical materials is currently being developed by EIOPA. - The majority of instruments will be available either just before the IRRD’s application date or approximately 6 months after. - Implementation risk: - Dependence on resources available to EIOPA creates uncertainty about detailed requirements MS need to implement, potentially compromising timeliness of practical implementation. - Prioritization of Level 2 and Level 3 measures has been undertaken to enable preparation of pre-emptive recovery and resolution plans. Recommendation: - A minimum harmonization framework for IGS should be implemented across MS to protect EU policyholders, particularly those who buy insurance products on a cross-border basis and foster greater trust in the single market. ### Proposal for EU Retail Investment Strategy (RIS): objectives, proposed measures, and legislative progress - Development and objectives: - RIS developed by the EC based on EIOPA’s and ESMA’s advice, with input from NCA members. - EC carried out its own studies including a market wide mystery shopping exercise. - Objectives: strengthen legislative framework to enable retail investors to make more informed decisions, provide adequate protection, enhance trust, and increase retail investor participation. - Proposals to enhance retail investor protection include: - Improve disclosures and protect from misleading marketing communications; - Introduce clear pricing process into product oversight governance by enhancing the existing value for money assessment including through mandatory EU benchmarks; - Address conflicts of interest in distribution process and introduce a partial ban on inducements for execution-only trades; - Encourage wider range of cost-effective products to be sold including a ‘best interest test’ for payment/receipt of inducements; - Uphold high standards of professional qualification for financial advisors; - Member states to implement measures to support financial literacy; - Enhance supervisory cooperation to ensure rules are applied in a coherent manner across EU. - Legislative progress and positions: - Commission’s legislative proposal published in May 2023. - European Parliament agreed negotiating mandate on the regulation amending PRIIPs on 11 April 2024. - European Parliament agreed negotiating mandate on the Omnibus directive on 23 April 2024. - Council of the European Union agreed its negotiating mandate on 12 June 2024. - Co-legislators have proposed to remove the partial inducement ban and focus on transparency of conflicts of interest. - Co-legislators proposed downgrading mandatory EU-wide value for money benchmarks to a supervisory tool. - Possibility for national benchmarks for insurance-based investment products, in limited cases, proposed. - A concurrent peer group product assessment was introduced by both the European Parliament and Council; under the Council’s negotiating mandate it would need support by a non-public EIOPA/ESMA database. - EIOPA and ESMA concerns: - In a joint letter, EIOPA and ESMA expressed concerns that establishing a database as a tool only for a certain group of market participants would not constitute an efficient use of ESMA’s and EIOPA’s resources. - EIOPA indicated concerns about adequacy of resources for creation of the database which will be costly for the two ESAs. - Final deliverables expected of the ESAs must be matched by adequate human and budgetary resources. - Depending on negotiations, EIOPA may have to develop an online comparison tool for PRIIPs and conduct ongoing consumer testing of the PRIIPs KID — both resource-intensive. - Concern about potential additional hurdles in the Council’s position requiring request by at least two member states to establish supervisory collaboration platforms. - Implementation workload: - Implementation of RIS will result in a significant amount of work for EIOPA and ESMA. - Proposed additional deliverables include database, online comparison tool, RTSs, implementing technical standards, value for money benchmarks and guidelines. - EIOPA and ESMA will need resources for supervision, promotion of convergence, consultation processes, and consumer testing. - Risk that final legislative outcome might not strengthen provisions in all originally proposed areas. ### Digital Operational Resilience Act (DORA): scope, timeline, elements, and oversight - Timeline and coverage: - DORA came into effect in January 2023 and will apply from January 2025. - Covers 21 distinct types of financial entities; three fall under EIOPA’s jurisdiction: - (i) insurance and reinsurance undertakings that are part of the Solvency II framework; - (ii) institutions for occupational retirement provisions with more than 15 members; - (iii) insurance and reinsurance intermediaries, including ancillary insurance intermediaries that exceed the size of small and medium enterprises. - Technical standards: - RTSs for DORA have been developed by the ESAs and submitted to the European Commission according to legislative deadlines in January and July 2024. - At the date of the mission, six out of ten technical standards had been adopted by the European Commission with three of those published in the Official Journal of the European Union. - Six main elements introduced by DORA: - (i) harmonized cross-sectoral requirements; - (ii) a level playing field among all competent authorities with respect to measures to supervise ICT risk supervisory powers; - (iii) a definition of the concept of ICT third party service provider in a much broader sense than ICT outsourcing; - (iv) an oversight framework for the critical ICT third-party service providers at EU level; - (v) mandatory threat led penetration testing at EU level; - (vi) legal precedence for DORA for financial entities (so called lex specialis) over the generally applicable requirements of the Network for Information Systems Directive and Critical Entities Resilience Directive. - DORA rulebook elements: - ICT Risk Management: strong governance and controls, policies, monitoring, and regular assessments. - Incident Reporting: report major ICT incidents to national authorities within tight timeframes including nature, cause, and impact. - Operational Resilience Testing: regular testing of ICT systems, especially for critical functions. - Third-Party Risk Management: ensure ICT third-party service providers comply with stringent ICT security and resilience standards; contracts should reflect regulatory obligations. - Oversight of CTTPs: designates "critical ICT third-party service providers" (CTTPs) to be overseen by the ESAs. - Information Sharing: encourages collaboration and sharing information on cyber incidents and threats. - Oversight architecture and start date: - EIOPA, in collaboration with other ESAs, will commence oversight of the CTPPs to foster convergence and enhance digital operational resilience. - The three ESAs have created a joint Directorate in charge of oversight activities for CTTPs — a European first — with a Director overseeing activities across the three ESAs. - Once operational, oversight will involve the three ESAs, 60 NCAs across the three sectors, and the ECB. - Oversight activities will start from January 17, 2025. - Practical and international challenges: - Practical issues remain on how oversight activities, including on-site inspections, can be undertaken at CTPPs in third countries, particularly cloud service providers. - DORA requires CTPPs to have a European subsidiary established within 1 year of designation as a CTPP. - Coordination with third country authorities will be required and is complex; ESAs have started engaging with prioritized third country authorities. - EU-SCICF: - EIOPA will assist implementing the EU-SCICF, an outcome from an ESRB December 2021 recommendation. - Framework designed to facilitate an effective and coordinated response at EU level to significant cross-border cyber incidents impacting financial stability. - Article 49 of DORA enabled creation of cross-sectoral ICT incident reporting. - EU-SCICF is a coordination body, not a decision-making body. - The EU-SCICF will be set up step-by-step starting on 17 January 2025, with full set-up subject to outcome of a Report to be drafted by the EC. - EU-SCICF will involve national authorities, European-level authorities including the three ESAs, macroprudential and resolution authorities; participating members will exchange information on potential systemic cyber incidents or threats and coordinate actions and macroprudential mitigation tools. - ESAs high-level ICT TPP analysis (2022): - ESAs and competent authorities identified approximately 15,000 ICT TPPs directly serving entities in the financial sector across the EU. - Frequently utilized ICT TPPs support many critical or important functions and offer a wide array of services. - For critical or important functions, most services are non-substitutable. - This analysis informs DORA implementation. ### Overall impact of reforms and policy recommendations - Overall assessment: - Legislative reform process across B to E constitutes an extraordinary level of change across many facets of insurers’ business models and creates significant workload for EIOPA and NCAs. - Reforms will take time to be fully integrated into insurer operations. - EIOPA’s heavy workload producing instruments and guidelines is diverting scarce resources from other relevant work. - NCAs and EIOPA will later have significant additional work to incorporate new requirements into supervisory processes. - Further measures to improve effectiveness of EU capital markets indicate possible further legislative reforms, which would add to regulatory fatigue. - The swift pace of the RIS legislative process could be slowed to incorporate further reforms and allow more preparation time. - Recommendations: - The EC and European Legislators should include in the RIS implementation any additional reforms pertaining to the design and distribution of insurance products envisaged to enhance EU savings and investments. - There should be a temporary pause in further regulatory reforms for the insurance sector once Solvency II review, IRRD, minimum harmonization of IGS and RIS implementation are complete, and a high bar should be set in determining the need for any further reforms. ### Insurance microprudential supervision: role of EIOPA and NCAs - Key point: - Insurance supervision remains fundamentally a national responsibility, through NCAs. - Institutional context: - EIOPA is part of the ESFS, which includes three ESAs: the EBA, ESMA, along with the European Systemic Risk Board (ESRB). - EIOPA collaborates closely with NCAs; in line with Article 6 of EIOPA’s Regulation, the Board of Supervisors, formed by 27 NCAs, is the main decision body. - NCAs continue to supervise individual financial institutions in their MS, while EIOPA and the other ESAs aim to enhance functioning of the single market. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025005.pdf* ### 52. EIOPA serves as an independent advisory body to the EC, the European Parliament, ### 1eurea2025005 - 52. EIOPA serves as an independent advisory body to the EC, the European Parliament, ### Role and scope - EIOPA serves as an independent advisory body to the EC, the European Parliament, and the Council. - Scope includes insurance undertakings, reinsurers, financial conglomerates, institutions for occupational retirement provision, and insurance intermediaries. - EIOPA has legal personality, administrative and financial autonomy, and is accountable to the European Parliament and the Council of the EU. - EIOPA collaborates closely with NCAs to fulfill its mission. ### Supervisory resources and capacity — structural overview - EIOPA has 4 functional departments: Policy and Supervisory Convergence Department, Oversight Department, Consumer Protection Department, and Risks and Financial Stability Department. - ESA funding model: NCAs contribute 60 percent and the EU 40 percent to the ESAs' budget. - EIOPA’s annual budget has increased by about 2 percent annually, and staffing has grown moderately. ### Staffing levels and deployment - Establishment: 220 FTEs. - Employed: 184 FTEs. - Seconded National Experts (SNEs) in establishment: 29; filled: 13. - Since 2022, EIOPA’s employed FTEs have been declining. - Competitive environment for specialized skills (digitalization, sustainability, cybersecurity, operational resilience) and limited financial resources impede recruitment and retention. ### Regulatory workload and new permanent tasks - New and expanding tasks increasing workload include: Solvency II review, IRRD, DORA development and implementation, proposal for the EU RIS, SFDR, Corporate Sustainability Reporting Directive, Corporate Sustainability Due Diligence Directive, and integration of other sustainability risks (biodiversity and social risks and opportunities). - Solvency II review tasks: draft and review RTS and guidelines, monitor implementation, new permanent tasks related to the Solvency Capital Requirement, collaboration with NCAs, proportionality, and macroprudential tools. - IRRD implementation tasks: develop technical standards and guidelines, establish a resolution committee, participate in resolution colleges. - Retail Investment Strategy (RIS) potential tasks: provide technical advice, develop technical standards and guidelines, create tools (databases, online comparison tools) related to PRIIPs Regulation and IDD, and assess Value for Money work. - Concern: EC Legislative Financial Statement (LFS) on RIS indicates allocated resourcing may not meet demands; EIOPA is concerned proposed resources would not match proposed new mandates. ### Data initiatives, DORA, AI, and cyber resilience - EIOPA contribution to European Single Access Point (ESAP): act as data collector for insurance and pension sectors. - EIOPA contribution to Supervisory Data Strategy: ensure accurate, consistent, and timely data collection while reducing reporting burden. - Support for discussions on Regulation on Financial Data Access (FIDA) from a consumer protection standpoint. - DORA: to address supervision of CTPPs under DORA, the three ESAs will each receive 10 full time equivalent positions. - DORA applicable from 17 January 2025. - Collection of fees and recruitment for relevant positions scheduled to begin in October 2025. - Preparatory work has been carried out primarily using existing resources. - ESRB Recommendation of December 2021: EIOPA will support establishment of EU-SCICF for coordinated response to major cross-border cyber incidents. - AI Act follow-up: ESAs including EIOPA will follow up on AI Act to address risks associated with specific uses of AI. ### Resource prioritization and supervisory convergence pressure - Rise in cross-border cases has intensified supervisory convergence activities, stretching resources. - Over the last 5 years, EIOPA deprioritized less critical supervisory convergence activities due to conflicting priorities and scaled down non-core activities. - Need for careful prioritization and strategic reallocations to manage both new regulatory demands and growing supervisory convergence responsibilities. ### Supervisory convergence tools, outputs, and activity levels - Tools include guidelines, recommendations, opinions, supervisory statements, EIOPA’s supervisory handbook, Q&As, and peer reviews. - Guidelines (Article 16, “level 3 measures”): more than 30 sets of guidelines for Solvency II, leading to over 700 individual guidelines across all three pillars; some are being reviewed per a prioritization plan to align with the Solvency II review. - Opinions (Article 29(1)(a)): EIOPA has published 16 Opinions since 2015 (Solvency II: 9; IORPs: 6; SFDR / IDD: 1). - Recent examples: Consultation on mass-lapse reinsurance (Annex to the Opinion on reinsurance) on 8 November 2024; Opinion on supervision of captives undertakings in July 2024; Opinion on sustainability claims and greenwashing in May 2024; Opinion on use of risk mitigation techniques in July 2021; Opinion on supervision of use of climate change risk scenarios in ORSA in April 2021 (with ongoing monitoring); Opinion on supervision of remuneration principles in April 2020; Opinion on implementation of the common framework for risk assessment and transparency of IORPs in July 2019; Opinion on non-life cross-border business of long-term nature in December 2018. - Supervisory Statements (Article 29(1)(a)): EIOPA has published 15 Supervisory Statements since 2017 (Solvency II: 10; IDD: 3; IORPs: 1; SFDR: 1). - Recent examples: Supervisory Statement on deduction on foreseeable dividends from own funds (February 2025); Supervisory Statement on supervision of reinsurance concluded with third-country reinsurers (April 2024); Supervisory Statement on differential pricing practices in non-life lines (March 2023); Supervisory Statement on supervision of run-off undertakings (April 2020). - Ongoing work: gathering information from NCAs on authorizations and rejections regarding acquisition of control in insurers by private equity firms, to draft supervisory statement addressing associated risks. - Supervisory Handbook: three handbooks for NCAs (prudential supervision under Solvency II, conduct of business supervision, supervision of IORPs); digital Supervisory Handbook Tool released December 2020 providing individual access to supervisors from NCAs. - Peer reviews: 12 peer reviews since 2013 (mainly insurance topics; 1 on pension supervision). - New framework in 2022 has EIOPA staff lead peer reviews. - Completed peer reviews: outsourcing (2022), Product Oversight Governance (2023), Prudent Person Principle (PPP) (2024). - Finalized peer review of supervision of stochastic approach in calculation of technical provisions (March 2025). - Follow-ups conducted for peer review on key functions (2021), propriety of Administrative, Management, or Supervisory Body and qualifying shareholders (2022), application of the PPR for IORPs (2023), and EIOPA decision on collaboration of NCAs (2024). - Not all recommended actions have been implemented by NCAs during follow-up, increasing need for monitoring. - Recent improvements: targeted, risk-based approach to reduce scope and follow-up burden. ### Cross-border business — trends, tools, and limitations - Cross-border insurance services provision has approximately doubled since introduction of Solvency II in 2016. - Growth based on Freedom of Service (FoS) and Freedom of Establishment (FoE); sales through FoS expected to grow due to digitalization. - Cross Border Notification tool launched February 2023: used by all NCAs to perform notifications related to cross-border business (replacing e-mail communication). - Collaboration platforms (introduced 2017, enshrined in Solvency II Directive in 2019): oversight tools to strengthen cooperation between home and host NCAs. - Type 1 platform: EIOPA acts as coordinator where concerns exist. - Type 2 platform: NCAs create platform without EIOPA direct involvement. - Since 2017: 21 Type 1 platforms and 5 Type 2 platforms created. - Type 1 platforms deal with prudential and market conduct issues; EIOPA can request establishment, participate in activities including on-site inspections, request information; supervision/enforcement decisions remain with NCAs. - Current limits: EIOPA lacks powers to compel a home supervisor unwilling or unable to act, which can lead to consumer detriment and undermine Single Market trust. - Example case timeline: recommendation under Article 16 → notice of non-compliance → investigation into potential breach of Union Law → recommendation under Article 17(3) → EC formal opinion under Article 17(4) → NCA withdrew authorization on June 5, 2023 → company cannot sell new business but continues to accept premiums; EC initiated infringement procedure (ongoing). - Legal challenges and Access to Documents requests have tested EIOPA and EC legal powers. - Solvency II review provisions: - Definition of significant-cross-border activities linked to FoS/FoE and host MS activity: threshold includes total cross-border gross written premium in host MS exceeding EUR 15 million, or activities considered relevant by host supervisor to the host MS’s market to be further defined by EIOPA in an RTS. - From 2027, EIOPA will have a formal mediation role where NCAs in a collaboration platform disagree on actions or if an NCA does not carry out agreed actions in situations with serious concerns about negative effects on policyholders. - Where NCAs disagree about information sharing, EIOPA may publish findings, recommendations or measures stemming from supervisory work for policyholder protection or financial stability, including potentially the undertaking’s name unless there are good reasons not to do so. - Colleges of supervisors remain important for group supervision; regular exchange with EIOPA of the ORSA Report can improve EIOPA’s contribution to group supervision. - Longer-term consideration: endowing EIOPA with emergency powers to take binding decisions when home NCAs are unwilling or unable to act and policyholder protection is at risk — this may require more fundamental reform of the relationship between EU authorities and MS. ### Key statistics and exact figures (preserved verbatim) - ESAs funding split: NCAs 60 percent; EU 40 percent. - EIOPA annual budget increase: about 2 percent annually. - EIOPA establishment: 220 FTEs; employed FTEs: 184. - SNEs in establishment: 29; SNEs filled: 13. - DORA applicability date: 17 January 2025. - DORA fee collection and recruitment scheduled to begin: October 2025. - Solvency II cross-border threshold: EUR 15 million. - Opinions published since 2015: 16 (Solvency II: 9; IORPs: 6; SFDR / IDD: 1). - Supervisory Statements published since 2017: 15 (Solvency II: 10; IDD: 3; IORPS: 1; SFDR: 1). - Peer reviews since 2013: 12. - Cross-border collaboration platforms since 2017: 21 Type 1; 5 Type 2. ### Recommendations (as stated in source) - EIOPA should increase its efforts to recruit a full complement of staff to work on its heavy regulatory and supervisory agenda and NCA’s should ensure national seconded expert positions at EIOPA are filled. - EIOPA’s budget and staff establishment plan should be reviewed in light of the significant permanent tasks it has been given through legislative reform. In view of the increasing budgetary challenges for both the Authority and the NCAs, other funding mechanisms should be explored. - NCAs are recommended to agree to exchange the ORSA Report with EIOPA on a regular basis. - Consider endowing EIOPA with emergency powers to take binding decisions when home NCAs are unwilling or unable to act and policyholder protection is at risk in the context of cross border activities, noting this may require more fundamental reform of the relationship between EU authorities and MS. *Source: International Monetary Fund (excerpt).* ### 72. The 2018 EA FSAP TN contained a recommendation that European legislators endow ### The 2018 EA FSAP TN contained a recommendation that European legislators endow ### Internal models: usage and regulatory developments - As at year end 2023, there were four insurance groups and 82 solo insurance undertakings using approved full internal models. - There were 27 insurance groups and 66 solo insurers using a partial internal model. - Insurers representing more than 50 percent of the European insurance market in terms of gross written premiums use an internal model. - The Solvency II Review includes an amendment to require internal model users to submit their SCR calculated on the basis of the standard formula every two years for comparisons with the SCR based on the internal model and for comparisons among internal model users. - New QRTs introduced in the last revision of the ITS (applicable for end 2023) capture data by risk module to further enable better monitoring of internal models. - EIOPA published the Non-Life Underwriting Risk Comparative Study in Internal Models (“Non-Life Study”) in January 2024. EIOPA plans to conclude a similar analysis for life insurers during 2025. ### Comparisons of SCR: findings and variability - Internal models generally produce SCRs which are lower than SCRs produced from the standard formula. - The benefits of using an internal model, in terms of lowering SCR, vary by business model; lowering the SCR is not the sole reason for using an internal model—significant benefits exist in risk management, capital management and dialogue with the supervisor. - In the Non-Life Study, for premium and reserve risk internal model users operate on a more favorable capital intensity level, volatility and distribution type compared to the standard formula. - Significant variation was observed in diversification benefits between premium risk and reserve risk with internal model users demonstrating generally higher diversification benefits compared to the prescribed diversification benefits in the standard formula. - Results of comparisons between internal model SCRs and standard formula SCRs show a wide variety of results for insurers of the same type, ranging from small increases to very large discounts from using internal models compared to the standard formula. - For reinsurers, large differences (reductions or additions) may be justified because the standard formula often is not appropriately calibrated to a reinsurer’s business model; the same can apply to direct underwriters to a certain extent. - While results for non-life and composite insurers remained relatively stable over time, some significant variability in the comparison to standard formula SCR can be observed for life insurance groups. ### Limitations of simple comparison and benchmarking use - Limitations of a simple comparison between internal model SCR and standard formula SCR are acknowledged because the suitability of the standard formula SCR varies by business model. - Additional metrics would be helpful in monitoring internal model usage. - The comparison provides a useful benchmark and a way of identifying insurance groups using internal models that require greater scrutiny and is useful in identifying model drift. - Model drift is where an internal model gradually diverges from the actual risk profile of the firm over time due to, e.g., changes in the underlying risk environment, updates to the model, or shifts in the firm’s business activities. ### Supervisory powers, floors, and international precedent - In the Solvency II review, the power to apply a floor to the SCR has been included but only in limited, specific circumstances reflecting the effect of credit spread movements on the volatility adjustment (VA) where supervisors allow use of a dynamic VA in an internal model at a level below which benefits on the SCR in excess of a mitigation of exaggerated bond spreads are expected to occur. - The mission suggests outlier results for internal model SCRs may be addressed through supervisory convergence processes, but supports a floor to the standard SCR applicable in a wider set of circumstances to address some aspects of internal model SCR calculations. - A comparable approach in banking regulation is cited: the output floor in Basel III sets a lower limit on RWAs computed using internal models at 72.5% of the RWAs calculated using the standardized approach; one justification was to restore the credibility of internal models by providing a backstop. ### EIOPA’s supervisory convergence activities and constraints - EIOPA undertakes activities to foster supervisory convergence in internal model supervision, conducts country field visits, and produces comparative studies to inform country visits and technical assistance. - There are 19 NCAs which supervise insurance groups or insurers using internal models. - EIOPA undertakes country visits to two NCAs per year on average: 1 in 2020, 3 in 2021, 3 in 2022, 2 in 2023 and 2 in 2024. At such a rate, it will take nearly ten years to visit all NCAs. - NCAs with smaller markets and less resources request technical assistance from EIOPA; EIOPA has provided technical assistance to three NCAs since the inception of Solvency II, as at the time of this mission. - EIOPA’s access to insurer-specific information is quite limited and often depends on the goodwill of NCAs; EIOPA does not have automatic access to ORSA reports. - EIOPA is not considered a concerned supervisor in supervisory teams considering internal models. If there is a disagreement between two concerned supervisors, they can escalate to EIOPA for an opinion; if EIOPA has a different opinion from NCAs, there is no current way of resolving the issue. - A proposed improvement is for EIOPA to be considered a full member of the supervisory team with an equal say on issues related to internal models; however, there remains no mechanism for resolution of differences of opinion between EIOPA staff and NCAs. ### Resource needs and access to information - The mission concludes EIOPA needs more resources devoted to internal model convergence. Options discussed include internal reallocation, allocation of SNEs, increased overall resourcing for EIOPA, or enhanced ability to attract and compensate technical staff. - Formalization of EIOPA’s role in supervisory decisions about internal models is recommended, together with timely access to all documents available to supervisory authorities concerned (including the ORSA). ### Recommendations on internal models - EIOPA should obtain more resources to improve convergence of internal model supervision: in particular, more resources should be provided to undertake country visits regarding internal models and to enhance participation in colleges and work on comparative studies, benchmarking, or technical assistance. - EIOPA should be given stronger powers on supervisory decisions related to internal models. If EIOPA could be considered a full member of the supervisory team and therefore have an equal say with NCAs on issues related to internal model supervision, this would foster supervisory convergence. - A mechanism should be introduced to allow a binding technical review to resolve differences of opinion between EIOPA staff and NCAs on internal model supervision. A review panel with necessary technical knowledge should make decisions binding on relevant NCAs. - EIOPA, NCAs and the EC should discuss whether the introduction of a floor to address some aspects of the internal model SCR calculation is needed, either as a standard or on a case-by-case basis. ### Supervision of Market Conduct Risks: legal framework and objectives - The IDD regulates the design and distribution of insurance products within the EU, aiming to harmonize the insurance market and enhance consumer protection standards. - Key IDD aspects: accountability of insurers for products meeting consumer needs, accountability of distributors for consumer outcomes, conduct of business and transparency rules for distributors including a standardized insurance product information document for non-life insurance products, clarification of cross-border distribution procedures and rules, and the principle that Member States shall ensure NCAs have sufficient powers and resources for supervision and sanctioning of non-compliant insurance distributors. - The IDD is in most areas a minimum harmonizing directive, setting baseline standards while allowing Member States to introduce more stringent provisions. ### Connection between market conduct and prudential risks - Poor market conduct outcomes can be symptoms of poor governance and may lead to prudential problems due to the need for consumer redress. - Past scandals cited include Payment Protection Insurance (UK) and mis-selling of unit linked policies (Netherlands) as examples where conduct issues led to broader sector problems. ### Consumer trust and Eurobarometer statistics - According to Eurobarometer results from July 2024: - 8 percent of EU consumers do not have any non-life insurance products (varying from 2 percent in Sweden to 24 percent in Bulgaria). - The majority of EU consumers only have motor and household insurance. - EIOPA’s Eurobarometer survey from 2024 shows 41 percent of EU consumers still do not trust insurers to ensure good consumer outcomes. - EIOPA’s 2022 Eurobarometer data shows that in the event of a natural catastrophe, 22 percent of consumers would not know if they were covered or were not sure about exact coverage/exclusions; the same survey administered in 2023 shows 19 percent of EU consumers were unsure of the exclusions that may apply in a natural catastrophe event. - EIOPA has increased focus and resources into market conduct supervision, although resources remain limited due to overall resourcing constraints. ### Product Oversight and Governance (POG) - The POG Delegated Regulation requires products to be compatible with the needs, characteristics and objectives of a defined target market and requires insurers to give prime importance to customers’ interests during product design and throughout the lifecycle. - EIOPA’s initial POG work focused on supervisory convergence: a chapter of the EIOPA supervisory handbook (April 2020) and EIOPA’s approach to supervision of POG (September 2020). - EIOPA issued supervisory statements covering: - POG requirements in the context of COVID-19 (July 2020); - Assessment of value for money of unit-linked insurance products under POG (November 2021); - Exclusions in insurance products related to risks arising from systemic events (September 2022); - Differential pricing practices in non-life insurance lines of business (March 2023). ### POG peer review findings - EIOPA conducted a peer review on POG which showed most NCAs did not have an adequate framework for POG for insurance-based investment products. - The peer review assessed how NCAs supervise POG requirements in relation to insurance-based investment products and covered the stages: target market assessment, product testing and product monitoring and review. - EIOPA issued its final report in July 2023. The reference period of the peer review was Q1-2008 to Q1-2022. - EIOPA issued a total of 110 final recommended actions to the 30 participating NCAs. - Of these, 18 NCAs were found to have met few expectations on POG supervision and received four or five recommended actions each. - Recommended actions focused on: (i) organization and resources of POG supervision; (ii) risk-based approach; (iii) setting and communicating supervisory expectations; (iv) supervisory processes; and (v) supervisory activities. ### Risk identification, retail risk indicators, and exercises - Due to lack of conduct reporting, EIOPA developed retail risk indicators using selected Solvency II data to identify market conduct risks. Key indicators: claims ratio, claims rejected ratio and commission rate. - Indicators found that income protection, miscellaneous financial loss and legal expenses lines of business have the highest commission rates and lowest claims ratio. - EIOPA launched its first coordinated mystery shopping exercise with eight NCAs covering the sale of insurance-based investment products; the exercise uncovered instances of poor disclosure and possible mis-selling. No decision has yet been made to publish results and next steps are undecided. ### Country visits, thematic reviews, and follow-up challenges - Since June 2018 EIOPA carried out 18 conduct country visits and undertook two thematic reviews; the most recent thematic review focused on credit protection insurance in 2020. - Country visits found differing approaches to conduct supervision with some NCAs dedicating limited attention and resources to conduct (some mostly doing complaints handling). - The credit protection insurance review identified problematic issues: high commissions, low claims ratios, problematic business models, cross-subsidization of loans’ profitability with banks, and increasing potential prudential risks through risk of redress. - Limited follow up to thematic reviews and country visits is a challenge. Following the credit protection insurance thematic review, EIOPA issued a warning identifying issues and actions, but enforcement and adequate follow up are difficult. - EIOPA’s feedback is not binding, follow-up actions are divergent, colleges do not pay full attention to conflicts of interests and governance issues, and NCAs face resourcing and legal risk challenges in enforcing conduct supervision. ### Recommendation on market conduct supervision - Provide EIOPA with more direct ability to identify, analyze and assess risks for policyholders which are relevant to multiple member states. *Source: IMF mission text (excerpt).* ### 90. Sustainable Finance is a key strategic priority for EIOPA. From an organizational ### Sustainable Finance is a key strategic priority for EIOPA ### EIOPA Sustainability Unit - Purpose and scope: - Dedicated Sustainability Unit operating horizontally across the organization to develop and implement EIOPA's overarching strategy concerning sustainable finance. - Role is coordination; the unit does not undertake all sustainability work but must be aware of all sustainability-related activities within EIOPA. - Mandate extends beyond climate risks to wider environmental issues such as biodiversity, social risks and governance issues; it also considers the sustainability of EIOPA’s own operations. - Staffing and organization: - Staffed by a combination of five full-time experts and part-time specialists from other departments. - Projects pursued across all core business areas, including prudential and conduct policy, prudential and conduct supervision, and financial stability. - Created more structured, regular exchanges about sustainability issues among EIOPA management and staff. ### EIOPA’s Opinion on the Use of Climate Change Risk Scenarios in ORSA - Objective and scope: - Opinion addressed to NCAs to build a common supervisory culture and consistent practices across the EU. - Seeks to integrate climate change risk scenarios into the ORSA to ensure undertakings consider both short and long-term climate risks. - Expectations for insurers: - Integrate climate change risks into governance, risk management and ORSA, including both physical risks and transition risks. - Perform qualitative and quantitative analyses of climate change risks covering short, medium, and long-term horizons. - Assess materiality of climate change risks by evaluating potential impact on solvency and financial position. - Supervisory actions and monitoring: - Requires NCAs to review integration of climate change scenarios in ORSA during supervisory activities and ensure insurers take appropriate actions. - EIOPA conducting a monitoring exercise surveying both NCAs and insurers, aiming to cover 80 percent of the market. - These requirements will become part of the Solvency II framework and should feed into the development of RTS on Sustainability Risk Management Plans. - EIOPA has coordinated discussions about climate change risk scenarios in some supervisory colleges focusing on group-level scenario analysis and ORSA integration. ### Incorporating Climate Risks into Pillar I Requirements (Solvency II Review) - Mandate and timeline: - Work based on EC proposal for the Solvency II amending directive in 2021; Solvency II Review mandates EIOPA to assess whether dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental or social objectives would be justified, including in relation to fossil fuel related assets. - EIOPA published a consultation paper in December 2023 on Prudential Treatment of Sustainability Risks, followed by a report in November 2024. - Analytical approach: - Analysis relied on historical data and forward-looking analysis; noted historical data may not sufficiently reflect emerging changes in risk patterns, particularly transition risks. - ESRB advice emphasized prudential policy should be anchored in risk-based analysis and not used to achieve broader sustainability policy objectives. - Key quantitative methodologies: - Equity risk analysis: Value-at-Risk on historical data and forward-looking analysis using projected equity shocks based on eight published scenarios. - Spread risk on corporate bonds: 99.5 percent 12-month Value-at-Risk, calculated on the series of annual spread changes and measured in basis points; transition return shocks derived from disorderly transition scenarios used for equity risk. - Analysis demonstrated differentiated and elevated loss potential of fossil fuel-related stocks and corporate bonds compared to other economic activities. - Policy options and impact: - Key recommendation: additional capital requirements for exposures to fossil fuel-related equity and corporate bonds to mitigate stranding risk. - EIOPA provided three options for both fossil fuel-related equities and corporate bonds: - Option 1: Maintain status quo for Pillar 1 requirements. - Option 2: Differentiate based on existing frameworks — for equity treat fossil fuel-related stocks as Type II equity (i.e., a capital charge of 49 percent rather than 39 percent for Type I equities) and for bonds a rating downgrade of bonds related to fossil fuel activities. - Option 3: Dedicated supplementary capital requirement — for fossil fuel-related equities add 17 percentage points to existing equity related capital requirements; for fossil fuel-related bonds a 40 percent increase in the spread risk charge. - EIOPA’s impact assessment indicates the proposed policy options have a minimal effect on the aggregated solvency ratio of insurance undertakings in the EEA, primarily because they are well diversified and have limited direct exposure to fossil fuel-related assets. - Other asset differentiations considered: - Energy efficiency impact on property risk: did not recommend differentiated capital treatment due to mixed quantitative evidence. - Climate adaptation measures and non-life underwriting risk: did not find compelling quantitative evidence to justify differentiated treatment where adaptation measures are in place. - Suggested repeating analyses if further market developments improve data availability; future extension of solvency capital requirement analysis for non-life natural catastrophe risk suggested. - Social risks: considered but no dedicated Pillar I prudential treatment advised at this stage due to lack of data and risk models. - Internal models: - Insurers with approved internal models account for over 50 percent of the European insurance market. - Internal model users historically take into account risks not addressed in the standard formula (example: sovereign bond risks). - Uncertainty remains on how NCAs or EIOPA will ensure equivalent risk assessments are included in internal models if changes to the standard formula are written into law. ### Recommendations (from the mission) - Ensure prudential policy continues to be anchored in risk-based analysis, preserving the primacy of prudential policy objectives where they may conflict with other policy objectives. - If additional risk charges for fossil fuel-related assets are adopted in the standard formula, supervisory review processes must ensure internal model users have recognized such differences in the capital required in relation to those assets. ### Natural Catastrophe Risk Reassessments in the Solvency II Pillar 1 Standard Formula - Context and mandate: - EIOPA consulted in April 2024 on reassessment of catastrophe risks in the Solvency II Pillar 1 standard formula, noting natural catastrophes are becoming more frequent and severe across Europe due to climate change. - Pursuant to the Solvency II Review, EIOPA mandated to review at least every five years the scope and calibration of the standard parameters of the non-life catastrophe sub-module of the Pillar 1 SCR with respect to natural catastrophe risk. - Proposed changes: - Proposing new risk factors for 25 perils/regions across all five perils (flood, hail, earthquake, windstorm, subsidence) included in the standard formula. - Recommends including natural catastrophe risks for more countries; for flood risk nine countries including the Netherlands, Ireland and Finland are recommended to be added. - Considering adding perils such as wildfire, coastal flood and drought in the future. - Data and internal models: - Some evidence for recalibration comes from undertakings using internal models for Pillar 1. - No further information provided on how internal model users are calibrating these risks; given internal model users account for over 50 percent of the market, their calibration is important. - Recommendation: - Once EIOPA completes its reassessment of natural catastrophe risks in the Pillar 1 standard formula, it should review with NCAs how internal model users are calibrating natural catastrophe risks to ensure they are considering at least the same risks as the standard formula. ### Greenwashing: Advice and Supervisory Findings - Final advice and Opinion: - In June 2024, EIOPA issued final advice to the EC on greenwashing risks and the supervision of sustainable finance policies and issued a related Opinion on the supervision of sustainability claims. - Advice built on a May 2022 EC request for input and complemented EIOPA’s Progress Report on greenwashing published in June 2023. - Survey and findings: - Coordinated a survey among 16 national supervisors covering 99 insurance and pension providers. - Found providers generally complying with sustainability-related requirements but identified areas for improvement, particularly SFDR product-level website disclosure and consideration of sustainability-related objectives in product manufacturing. - Included need for a more consumer-centric approach for sustainability preferences and simplification of consumer-facing sustainability disclosures. - Identified non-life products with sustainability features, such as products that provide rewards for consumers adopting sustainable behaviors. - Supervisory attention and challenges: - Increase in supervisory attention by NCAs around sustainability-related requirements, though focus remains limited. - In 2024 more NCAs reported occurrences of greenwashing or potential greenwashing (up from 8 in 2023). - NCAs reporting supervisory activities around greenwashing: 21 in 2024 compared to 15 in 2023. - Challenges: resource constraints, lack of sustainability-related data, and lack of a common approach to supervising greenwashing. ### Insurance Protection Gap for Natural Catastrophes (Nat Cat Protection Gap) - Scale and coverage: - Estimated more than EUR 900 billion in direct economic losses caused by natural catastrophes in the EEA between 1980 and 2023. - Almost a fifth of the losses over this 43-year period occurred in the last three years. - Only approximately 25 percent of these losses were insured. - Losses not insured are referred to as the Nat Cat insurance protection gap. - Financial stability channels: - ECB and EIOPA identified channels for natural catastrophe risk to impact financial stability: - Physical damage to assets can decrease collateral values and reprice loans and securities for financial institutions in high-risk areas. - Physical risks can disrupt supply chains, causing substantial losses for the real economy and impacting financial institutions’ balance sheets. - Concentration of key economic activities in high-risk areas can magnify losses, potentially reducing credit provision in high-risk areas and for lower-income borrowers. - National schemes and EU Solidarity Fund: - In the EEA, national schemes complement private insurance to increase societal resilience, insurance penetration, risk awareness, prevention, and insurance capacity. - EU Solidarity Fund provides EU-state backed funding for disaster relief but is not an insurance product; objective is financial assistance to eligible states for major/regional natural disasters or major public health emergencies with serious repercussions. - Drivers of the protection gap and demand-side research: - Demand-side barriers include income levels and perceptions of unaffordability; demanding purchasing processes; lack of clarity in terms and conditions; previous negative claims experiences; misperceptions of Nat Cat risk; and high expectations of government intervention. - Potential solutions identified: increase risk awareness; simpler, consumer-friendly purchasing processes; better comparison and greater standardization of products around coverage, exclusions and pricing structures. - Climate Resilience Dialogue Final Report: - Highlights increasing frequency and severity of climate-related hazards (floods, wildfires, heatwaves, droughts, storms). - Identifies low risk awareness, insufficient data for risk assessment, and affordability issues as contributors to the protection gap. - Proposes multi-stakeholder collaboration, improved risk reduction measures, and innovative insurance solutions. - EIOPA Nat Cat Dashboard: - Created to monitor risks related to the insurance protection gap in Europe at the request of the EC. - Aims to assist understanding of what drives the Nat Cat protection gap in each country in the EEA to identify measures to decrease societal losses. - Four dashboard views: current view (current protection gap per peril), historical view (actual historical protection gap per peril since 1980), country view (current and historical protection gaps for each country), country insurance view (how natural catastrophes are covered by country). *Source: Content unit 1eurea2025005 — Sustainable Finance and related EIOPA activities (excerpt).* ### 106. EIOPA is continuing work on addressing the demand side issues for Nat Cat insurance ### EIOPA is continuing work on addressing the demand side issues for Nat Cat insurance ### Natural catastrophe (Nat Cat) insurance — demand-side measures - EIOPA issued a Supervisory Statement on exclusions in insurance products related to risks arising from systemic events to promote supervisory convergence in the assessment of the treatment of exclusions as part of the product design and drafting of terms and conditions. The statement highlights that exclusions should be clearly presented to consumers. - EIOPA is undertaking a small survey in eight MS on contract exclusions related to natural catastrophe to assess: - clarity of coverage and exclusions in insurance product information documents compared to the target market’s needs, objectives, and characteristics; - whether an add-on Nat Cat coverage is offered when the standard wording of the policy excludes those Nat Cats; - different initiatives in each market aimed at increasing consumers’ awareness about the availability of Nat Cat coverage. ### Centre of excellence for catastrophe modelling and data — supply-side and data sharing - EIOPA has established a “Centre of excellence for catastrophe modeling and data” to provide European supervisors and insurers with expertise, studies, tools and data to enable effective assessment, monitoring and supervision of catastrophe risks. - The Centre aims to allow national and European public authorities to gain a common understanding of catastrophe risks, take preventive measures, address the insurance protection gap, and improve public awareness of risks related to catastrophes. - EIOPA is working on the development of solutions for the collection and dissemination of uniform and comprehensive catastrophe risk and loss data. *Source: 1eurea2025005 - 106. EIOPA is continuing work on addressing the demand side issues for Nat Cat insurance* ### Annex II. List of NCAs for Insurance Supervision ### Annex II. List of NCAs for Insurance Supervision ### List of National Competent Authorities (NCAs) and their supervisory roles - Austria — FMA - Finanzmarktaufsicht (Financial Market Authority): Prudential & market conduct - Belgium — NBB - Nationale Bank van België (National Bank of Belgium): Prudential supervision. The Financial Services and Markets Authority (FSMA) is responsible for the market conduct supervision - Croatia — Croatian Financial Services Supervisory Agency: Prudential & market conduct - Cyprus — Αρμοδιότητα της Υπηρεσίας Ελέγχου Ασφαλιστικών Εταιρειών (Cyprus Insurance Companies Control): Prudential & market conduct - Estonia — Finantsinspektsioon (Estonia Financial Supervision Authority): Prudential & market conduct - Finland — FIN-FSA - Finanssivalvonta (Finnish Financial Supervisory Authority): Prudential & market conduct - France — ACPR - Autorité de Contrôle Prudentiel et de Résolution (Prudential Control Authority): Prudential & market conduct - Germany — BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority): Prudential & market conduct - Greece — Τράπεζα της Ελλάδος (Bank of Greece - Department of Private Insurance Supervision): Prudential & market conduct - Ireland — Central Bank of Ireland: Prudential & market conduct - Italy — IVASS - Istituto per la Vigilanza sulle assicurazioni: Prudential & market conduct - Latvia — Latvijas Banka: Prudential & market conduct - Lithuania — Lietuvos Bankas (Bank of Lithuania): Prudential & market conduct - Luxembourg — Commissariat aux Assurances: Prudential & market conduct - Malta — Prudential & market conduct Prudential & market conduct - The Netherlands — DNB - De Nederlandsche Bank (National Bank of Netherlands): Prudential supervision. The Autoriteit Financiële Markten (AFM) is responsible for the market conduct supervision - Portugal — AUTORIDADE DE SUPERVISAO DE SEGUROS E DE FUNDOS DE PENSOES: Prudential & market conduct - Slovakia — NBS - Narodna Banka Slovenska (National Bank of Slovakia): Prudential & market conduct - Slovenia — AZN - Agencija za Zavarovalni Nadzor (Insurance Supervision Agency): Prudential & market conduct - Spain — Dirección General de Seguros y Fondos de Pensiones: Prudential & market conduct *Annex II. List of NCAs for Insurance Supervision — source document content* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025005.pdf_