Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the jurisdictions in which Swiss Re operates. In 2016, Swiss Re remained strongly engaged in the regulatory debate, striving to mitigate potentially negative impacts while supporting reforms that could enhance the overall health of the sector, facilitate convergence of regulatory standards or generate business opportunities.
While Solvency II took effect in 2016 and applies across the European Economic Area, national discretions and different supervisory interpretations (eg the recognition of reinsurance) distort a level playing field. The European Commission will review Solvency II in 2018, in part to address such inconsistencies. Additionally, the European Insurance and Occupational Pensions Authority intends to add a macro-prudential framework for insurance to Solvency II, to regulate systemic risks across the insurance industry.
Prudential regulation is developing towards more risk-sensitive and economic-based capital regimes, yet regulatory fragmentation remains high. Local capitalisation rules often fail to fully recognise the benefits of risk mitigation and diversification. In addition, there are moves to limit the use of internal models influenced by post-crisis banking regulation. Swiss Re strongly supports the use of internal models, full recognition of risk mitigation and diversification, appropriate consideration of counterparty default and concentration risk, and efficient application of eligible capital instruments.
National protectionism restricts the free flow of risk and capital. The outcome of the Brexit negotiations between the UK and the EU could potentially limit the ability to benefit from the free movement of services, including reinsurance. Swiss Re is advocating for removal or reduction of market access barriers, so that policyholders, governments, taxpayers, and national economies can fully benefit from international diversification and therefore reliable, quality, and affordable risk cover.