On June 7, IVASS (Italian Insurance Supervisory Authority) published the long-awaited Regulation no. 24/2016 relating to the investments and assets covering technical provisions.
The enactment of Regulation 24, which actually repeals the previous Regulation no. 36/2011 on the same matter as October 1, 2016 was preceded by a long consultation phase, which ended in February of this year, but was not immediately followed by the publication of the text. Hence, the suspense of the sector players and the market for a regulation rightly considered essential in the implementation of EU Directive 2009/138 (Solvency II).
Unlike the previous Regulation no. 36, this Regulation no. 24 cancels (with a few exceptions) the asset macro-classes in which companies are allowed to invest and the investment limits in each of them, in keeping with the provisions of Solvency II, which, on one hand, has introduced the principle of the freedom of investment and, on the other hand, requires that the undertakings make a self-assessment of the risks, according to the prudent person principle, and to indicate, based on these, their requirements in terms of investments and provisions.
As anticipated, Regulation no. 24 retains a few limitations to the freedom of investment and, more specifically, to direct financing, structured products and derivatives, in relation to which, along the same lines of the previous Regulation no. 36, the undertakings are required to contain their investments within specific thresholds (as in the case of direct financing) or to evaluate them with utmost prudence (as in the case of structured products and derivatives).
As in the previous Regulation no. 36, the prohibition to consider “Shareholders’ loans” as assets eligible to cover technical provisions has also remained.
The definition used in Regulation no. 24 of this type of assets, at first sight, may leave room for non-univocal reading. While the intent is clear that the assets eligible to cover technical provisions should not include the loans granted to legal entities established in corporate form, in which the undertakings have a direct holding higher than 20% or on which in any case they exercise a significant influence (pursuant to Article 2359, Italian Civil Code), nothing is stated in regard to the case where the loan is granted to entities devoid of a legal personality (such as for example the funds).
In regard to the funds, it should be noted, on the same lines of the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014, supplementing the aforementioned Directive 2009/138/EC (Solvency II), that according to Regulation no. 24, so-called “complex” assets are not only the Alternative Investment Funds (AIF), but also, more in general, all the funds, including collective investment undertakings (OICR).
Since the undertakings are required to monitor continuously and carefully the risk to which the investment in complex assets exposes them (through a method that basically reproduces the so-called "look through approach", as required by the aforementioned Delegated Regulation in case of investments in funds, when the undertakings apply the so-called “standard formula”), one may wonder if the definition of complex asset, applied without distinction to any category of funds, really makes such investments more difficult.
This clearly is a reasonable concern, if one considers that the life insurance policies with financial components in the form of the unit-linked policies are based, as a matter of fact, on investments in this type of assets.
With regard to these policies, moreover, it should also be noted that the Supervisory Authority has announced, in the replies at the end of the public consultation on Regulation no. 24, that it shall soon review IVASS Circular no. 474/2002, in the part still in force (Section 3, laying down a list of assets eligible to cover technical provisions for this specific type of policies).
We hope therefore that despite the stance already expressed by the Authority on the classification of the funds as complex assets, the competition gap with the European undertakings may be finally filled due to the limited list of assets and related investment limits still in force in the aforementioned Circular.
In general, however, it is clear that IVASS aims to keep a certain degree of control on the self-assessment ability of the undertakings regarding their requirements in respect of the risks taken - which is however required under Solvency II; in fact, Article 9 of Regulation no. 24 requires of the undertakings to notify the investment resolutions to the Supervisory Authority within fifteen days from their adoption, while the following Article 28 grants IVASS the power to take action and inhibit the related use in case it assesses that the assets freely chosen by the undertaking to cover their technical provisions are inadequate or that in the undertaking’s choice the prudent person principle has been violated.
Despite the dissatisfaction voiced by more than one commentator on this point, one should actually wonder if, in the present financial context, what has been described above should be positively welcome, especially for the financial uncertainties - and not only that – that post-Brexit circumstances seem to carry.
The uncertainties that today seem to worry the sector players the most include, in addition to the possibility of losing an important market such as London , and the possibility to consider in the future the assets coming from that market (subject however to a prior authorization) as freely circulating, also the future applicability of Solvency II to the English players.
In fact, it would be really unreasonable and anti-competitive were these players allowed to depart from this system after the efforts made by all the players, including the British ones, to fall into line with it.