EIOPA recommends improvements in the supervision of the ‘Prudent Person Principle’ following peer review

The European Insurance and Occupational Pensions Authority (EIOPA) published today the results of its Peer Review on the supervision of the Prudent Person Principle (PPP) under Solvency II. The review focused primarily on the supervision of investments in non-traditional and complex assets, including derivatives, and the use of such assets in unit-linked and index-linked contracts - where market risk is typically borne by the policyholder.

EIOPA launched this peer review given the importance of insurers' investment activities and in light of reported challenges in assessing insurers' compliance with the Prudent Person Principle.

The Prudent Person Principle requires insurance and reinsurance companies to only invest in assets whose risks they can properly understand, monitor and manage while bearing in mind the best interests of policyholders and ensuring the overall security, liquidity and profitability of the portfolio as a whole.

Scope

While the PPP applies to all investments, EIOPA chose to focus non-traditional and complex assets to keep the review targeted. The peer review draws on responses provided by national supervisors to a self-assessment questionnaire covering six broad topics from national supervisory frameworks and the treatment of individual investments to the valuation of investments and supervisory activities/actions.

EIOPA identified and analyzed altogether 15 areas related to the supervision of the Prudent Person Principle and is issuing a total of 49 recommended actions to 22 National Competent Authorities (NCAs) to enhance their supervision of this requirement and thereby help safeguard the interests of policyholders.

Recommended actions

As a result of the peer review, 11 NCAs received recommended actions regarding complex/non-traditional investments and were urged to develop internal NCA guidance to ensure a common approach during supervision or publish guidance to the market on what type of assessments would need to be carried out prior to investing in risky/complex investments. 8 NCAs were recommended to improve their supervision of derivatives either through regularly performing detailed off-site analyses and on-site inspections, or by providing detailed guidance on the supervision of derivatives used for hedging and efficient portfolio management.

7 NCAs were asked to develop, maintain and use risk indicators on the prudent person principle to implement a data-driven supervision. Just as many NCAs (7) were encouraged to provide specific supervisory expectations to insurers on how to assess whether investments for unit-linked and index-linked contracts are made in the best interests of policyholders.

Recommended actions were also issued regarding the following topics: NCA supervisory tools; the security, quality, liquidity and profitability of the portfolio; asset-liability management; valuation of investments; and the control of the risks of underlying assets for unit-linked and index-linked contracts.

A detailed run-down of each recommended action and the NCAs to whom they are addressed can be found in the final report of the peer review.

Go to the Final Report

View the Factsheet

Next Steps

As a follow-up of this peer review, EIOPA will monitor and assess NCAs' compliance with the recommended actions. EIOPA will also consider how to best reflect the overall findings of the peer review in its work on supervisory convergence and take the results into account, when applicable.

Background

In the context of enhancing supervisory convergence and in accordance with its mandate, EIOPA regularly conducts peer reviews in close collaboration with NCAs and with the aim of strengthening both the convergence of supervisory practices across Europe and the capacity of NCAs to conduct high-quality and effective supervision.

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