By Huw Jones
LONDON (Reuters) - The European Union's capital rules for insurers need changing to reflect low interest rates and provide stronger intervention powers like banning dividends to preserve solvency during market shocks, the bloc's insurance watchdog said on Thursday.
The EU is reviewing its Solvency II capital requirements for insurers in the bloc like Generali, Allianz and Axa that were introduced in 2016.
"EIOPA proposes changes in several areas but with balanced overall impact on insurers. This reflects the fact that Solvency II is overall working well," the European Insurance and Occupational Pensions Authority (EIOPA) said in a statement.
Keefe, Bruyette & Woods said in a research note to clients that while headline capital ratios will be little changed, the "sting in the tail" is that regulators are increasing their flexibility to interfere in capital management decisions at insurers to levels well above the legal minimum.
It will be up to the EU's executive European Commission to make proposals for legislative changes in the third quarter of next year, which would then need approval from EU member states and the European Parliament.
Extreme market volatility in March when economies went into pandemic lockdowns, and the impact on insurers of central banks slashing interest rates to negative territory in the euro zone, have shaped EIOPA's thinking.
The watchdog said national supervisors in the EU27 should have powers to impose a capital surcharge on insurers to cover systemic risk, and to impose additional measures such as a ban on dividends to preserve an insurer's financial position.
EIOPA called on insurers in April to suspend distributions to preserve capital during the pandemic, but Germany's regulators declined to fall in line.
Insurance Europe, an industry body, said EIOPA's "disappointing" proposals would make the capital rules more conservative and create a less competitive sector.
The review should focus on what needs fixing and not be an overhaul as proposed by EIOPA with its "very extensive list" of potential changes, Insurance Europe said.
EIOPA said supervisors should also have powers to temporarily freeze redemption rights of policyholders in exceptional circumstances.
There were areas of "significant concern" that need addressing in the review as cuts in interest rates to mitigate the economic hit from COVID-19 has sent almost the entire euro swap curve into negative territory, it said.
Insurers use rate curves to assess their liabilities and hence capital requirements.
"EIOPA's advice is that it is essential to recognise this economic picture in Solvency II," the watchdog said.
The watchdog also wants to ease or make the rules more "proportional" for less risky insurers.
Insurers should also have rules, like banks already have, that govern how they would be closed down in an orderly way if they failed, it said.
(Reporting by Huw Jones; Editing by David Evans, Bernadette Baum and Frances Kerry)
