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The Actuary The magazine of the Institute & Faculty of Actuaries

EIOPA president urges caution on counter-cyclical tools

Bernardino said that elements like the Pillar I equity dampener, the supervisory ladder of intervention and the Pillar II extension of the recovery period have the potential to mitigate pro-cyclical behaviour, "if properly calibrated and applied".

However, he expressed concern about proposals to add a counter-cyclical premium on top of the risk-free interest rate when discounting insurance liabilities in crisis times.

"While accepting that it is important to have a range of tools to use in crisis situations, I believe that we should be extremely cautious when designing this new tool," he said.

"First of all I don't believe that a complete formulaic approach is desirable or even possible. We should not pretend to play God and believe that we can decide in advance how the next crisis will look like," he added.

Bernardino called for the definition of a set of clear criteria and indicators that would be monitored by Eiopa and that would lead to a decision on the application of the Counter Cyclical Premium by EIOPA when certain defined thresholds were be exceeded.

He also stressed that the design of the Counter Cyclical Premium should not incentivise insurers to invest in higher risky assets and should not be used to maintain unsustainable business models in an on-going situation.

"It should be crystal clear that the Counter Cyclical Premium is a crisis tool and that it will not be used to diminish the level of protection of policyholders," he concluded.

Rules are described as procyclical when they unnecessarily amplify swings in underlying economic cycles or contribute to excessive market movements. Solvency II is carefully designed to limit procyclical effects, particularly in respect of equity risk, according to the European Commission.

Source: Insurance Insight