IMPACT ASSESSMENT OF THE PROPOSAL FOR THE 2020 REVIEW OF THE SOLVENCY II FRAMEWORK IN THE SCOPE OF THE PORTUGUESE MARKET

After implementation of the Solvency II framework in 2016, a need for a review was proposed for the year 2020 to make the European insurance sector more resilient so that in the future it is stable enough to weather crises. This dissertation provides an insight to the impact analysis of the proposed change of the long-term guarantees measures. The basis being the technical advice of European insurance and Occupational Pensions Authority (EIOPA) and the call for advice from The European Commission (COM). The study is carried out for the period of 2016 to 2020 within the scope of the Portuguese insurance market. The objective is to study the proposed changes and compare the two proposals of the Solvency II 2020 review through a quantitative analysis and to infer on its material impact. The main considerations under the two proposals of this report are to understand the impact of choosing a later starting point for extrapolation of risk-free interest rates after considering the information beyond, to assess the impact of the proposed volatility adjustment (VA) calibration particularly aiming to address overshooting effects and illiquidity of insurance liabilities. Further, we study the change in the interest rate risk capital requirement based on the new proposed calibration formulae and the impact of changing the cost of capital (CoC) rate from 6% to 5% to estimate the risk margin requirements. All inferences were deduced after analysing the change in average Solvency Capital Requirement (SCR) ratios and percentage changes wherever necessary. The change of the CoC rate from 6% to 5% in the estimation of the risk margin proved to have the most material impact on the SCR ratio of undertakings followed by the VA calibration and change in extrapolation method. The new interest rate risk capital requirement under the proposals saw an overall increase.