French economy minister calls for a 22% equity shock under Solvency 2

On the 10/29/19 at 8:08AM


Thibaud Vadjoux

The French economy minister defended insurance companies during the annual conference of their federation, calling for a lower capital charge under Solvency 2, in order to better finance the economy.

“We are going to fight to make the Solvency 2 revision a success”, Bruno Le Maire, French Minister of the Economy and Finances, said at the 11th international conference of the French Insurance Federation (FFA). After obtaining, with Dutch support, a reduction to 22% in the capital charge for long-term equity holdings early this year, Le Maire wants the same treatment for all equities, as recommended by the FFA. “We can’t ask insurance companies to take part in financing the economy while changing horses in midstream”, Le Maire said, regarding “absurd rules that contradict our objectives”.

Felix Hufel, head of BaFin, the German financial sector supervisor, also spoke out in favour of a revision of the prudential treatment of equities but while stressing risk management. “Our role as supervisory is to ensure that insurance companies do not forget their fiduciary responsibility to millions of insured parties”. 

For the revision of Solvency 2, planned for 2020, Bruno Le Maire has also set a priority of enhancing supervision of cross-border activities. In support of this, he cited defaults of some non-French-construction insurance companies, which have created problems for French companies.

Financing of the economy

The financing of the economy by French insurance companies is part of a “national strategic challenge” in Le Maire’s words. “It’s hard not to regret seeing great French companies unable to secure €100m in funding and having to go to US funds”, he said. Financing of tech companies is one of the preferred ways to go about this. In early September, several insurance companies pledged to invest €5bn in tech funds. “By the end of the year I will detail, alongside these insurance companies, the roadmap for deploying these investments”, the minister said, whose ultimate target is €20bn in public and private equity investments in “companies of the future”.

Through its Pacte law, the French government hopes that savers will also take part in financing the economy, by devoting more of their savings to unit-linked contracts. The goal is also to boost retirement savings funds from €200bn to €300bn by the end of the current presidential term, Le Maire said. But this proposed shift towards risky funds brought forth this reaction from Bernard Delas, vice-president of the French Prudential Control and Resolution Authority (ACPR): “The business of insurance companies is to sell security, not unit-linked contracts”. 

Change of paradigm for life insurance

Euro-linked funds will have a hard time, Le Maire acknowledged. “The drop in euro-fund yields will be inevitable and rapid. Saying the opposite would be to mislead savers.” The sector is facing an “inevitable and irreversible transformation of the life insurance model”, he said (see elsewhere). “Insurance companies must be prepared for an ongoing environment of low interest rates. “I was able to meet Mario Draghi and Jerome Powell recently. Interest rates are likely to remain low for some time to come”.

The situation has worried investors who are being squeezed by falling asset values and rising liabilities, who are also subject to lower discounting rates. “Insurance companies got a shock last summer. After producing early Solvency 2 reports, they found that once interest rates had gone into negative territory, the insurance and life insurance industry’s medium-term (5-10-year) prospects were a concern, to say the least”, said Xavier Larnaudie-Eiffel, deputy CEO of CNP Assurances. “We can live with very low rates for a decade. We have already experienced a low-interest-rate period, from 2008 to 2018. Reinvestments are now becoming very costly”, said Pierre Gramegna, Luxembourg’s Minister of Finances. 

The capital cost of holding bonds could become even higher in the coming revision of Solvency 2. In the “personal” opinion of Gabriel Bernardino, head of the European Insurance and Occupational Pensions Authority (EIOPA), “let’s not be naïve; current prudential regulations are not on the right path regarding risk management of interest rates that are now in negative territory”, he said.

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