The European Insurance and Occupational Pensions Authority has begun testing how Solvency II could impact on products with long-term guarantees offered by both life and non-life insurers.
Under the Long Term Guarantee Assessment process, insurers are being asked to use technical specifications published today to test what impact various planned approaches towards applying the new rules for Europe's insurance industry to long-term products and protection could have.
Insurers have been given until the end of March to carry out their assessment of how the measures would impact on policyholders, the insurance and reinsurance industry, supervisory authorities and the financial system as a whole.
The results of EIOPA's assessment are expected to feed into the much-delayed development of final proposals for Solvency II. The system had been expected to be implemented by January 2014, but a series of delays have made this unlikely.
Gabriel Bernardino, chair of EIOPA, said the assessment would provide a 'reliable basis' for an 'informed political decision' on how long-term guarantees are addressed by Solvency II.
'It is essential for policyholder protection and financial stability that Solvency II appropriately reflects the long-term financial position and risk exposure of insurance and reinsurance undertakings carrying out insurance business of a long-term nature,' he explained.
Among the features the process focuses on is a counter-cyclical premium which would apply in exceptional market circumstances to ensure Solvency II can cope with periods of crisis. It will also evaluate the matching adjustment - a mechanism to remove artificial volatility from the asset and liability management of insurance portfolios.
During April and May, data submitted by insurers will be validated by national regulators and then analysed by EIOPA. A report detailing the results of the assessment and EIOPA's conclusions will then be published in the second half of June.
Insurance Europe, which represents Europe's insurance industry, welcomed the launch of the assessment. It was crucial that Solvency II did not jeopardise the long-term approach to investment that insurers were able to take because of the long-term guarantees they offer, they explained.
This long-term approach allows them to provide better returns to policyholders and can also help them to find growth and stability.
Olav Jones, deputy director general of Insurance Europe, said: 'If these seemingly technical details of the new regime are not correct, the impact on the European insurance industry, its clients and the economy would be severe.
'Solvency II must not create unnecessary barriers to insurers providing guarantees for customers and investing long-term, not least because the insurance industry is by far the largest institutional investor in Europe, with over 7.7 trillion in assets.'
Last week, consultants Deloitte warned that depending on the outcome of the assessment, annuity rates could fall by as much as 20%.
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