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European regulator calls for insurers' capital calculations to be simplified

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European regulator calls for insurers' capital calculations to be simplified

The European Insurance and Occupational Pensions Authority, or EIOPA, has called for the calculation of insurers' solvency capital requirements to be further simplified.

In new advice to the European Commission about the calculation of the solvency capital requirement under the standard formula of Solvency II — Europe's insurance capital regime — EIOPA said the availability of new data meant that new calibrations were needed in several areas of risk, including catastrophes. The standard formula is used to calculate capital requirements for companies that do not have their own internal capital model.

EIOPA advised the EC to further simplify calculations for natural, man-made and health catastrophes, in particular fire risk and mass accident.

The regulator also outlined circumstances under which unrated debt and unlisted equity can be given the same treatment under the capital rules as rated debt and listed equity.

For interest-rate risk, EIOPA said the current approach does not cater to negative interest rates and is not effective when interest rates are low. The regulator has therefore recommended new calibrations that take recent evidence, such as negative rates, into account.

It added that in some areas, analysis of recent developments does not give enough reason to change the calibrations, such as for mortality and longevity risks and the cost of capital.

Cost of capital is one of the key elements of the risk margin, an additional buffer that insurers have to hold in addition to their capital requirements. EIOPA said other elements of the risk margin will be assessed in the overall review of the Solvency II regime in 2021.

EIOPA chairman Gabriel Bernardino said: "EIOPA's goal is to simplify the supervisory regime to remove technical inconsistencies and at the same time to ensure that Solvency II remains fit for purpose, proportionate, technically robust, risk-sensitive and consistent. In changing economic circumstances, the proposed adjustments to the capital requirements are necessary."

This is the second and final piece of advice from EIOPA in response to the EC's calls for technical advice. The commission is expected to complete its review of the solvency capital requirement by the end of 2018.