The European Union’s insurance coverage authority has proposed a blanket rule that might mandate insurance coverage companies to take care of capital equal to the worth of their crypto holdings as a part of a measure to mitigate dangers for policyholders.
The brand new proposal — made by the European Insurance coverage and Occupational Pensions Authority in a Technical Recommendation report back to the European Fee on March 27 — would set a far stricter customary than different asset courses, resembling shares and actual property, which don’t even should be half-backed.
“EIOPA considers a 100% haircut in the usual system prudent and acceptable for these belongings in view of their inherent dangers and excessive volatility,” it said in a separate assertion.
Such a measure would fill a regulatory hole between the Capital Necessities Regulation and Markets in Crypto-Assets Regulation (MiCA), EIOPA stated, noting that the European Union’s regulatory framework for insurers presently lacks particular provisions on crypto belongings.
Circle argued in January {that a} blanket 100% stress issue on crypto belongings didn’t account for lower-risk stablecoins. Supply: Circle
EIOPA outlined 4 choices for the European Fee to think about — one: make no modifications; two: mandate an 80% “stress stage” to crypto belongings; and three: mandate a 100% stress stage to crypto asset.
The stress stage percentages decide how a lot capital companies want to carry to remain solvent.
The fourth choice referred to as on the European Commission to think about the dangers of tokenized belongings extra broadly.
EIOPA stated choice three can be essentially the most acceptable choice.
“An 80% stress to the worth of crypto-asset exposures doesn't seem sufficiently prudent,” whereas “a 100% stress is extra acceptable and aligns with one of many approaches to the transitional therapy of crypto-assets beneath CRR,” EIOPA stated.
The 100% stress refers back to the assumption that the crypto asset costs might fall by 100% and that diversification — spreading the danger throughout totally different belongings — wouldn’t not cut back this stress. EIOPA identified that Bitcoin (BTC) and Ether (ETH) have fallen 82% and 91%, respectively, prior to now.
A 100% capital cost for crypto belongings would reflect a far stricter approach in comparison with shares, which vary between 39% and 49%, and actual property, which incurs a 25% capital cost, according to solvency capital necessities specified by the Fee Delegated Regulation 2015/35.
EIOPA stated a 100% capital cost for crypto asset-related (re)insurance coverage undertakings shouldn’t be “overly burdensome” and that there can be no materials prices for policyholders.
“The capital necessities would absolutely seize the danger of crypto-asset with a constructive impression on policyholder safety in case there are materials exposures sooner or later.”
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EIOPA acknowledged that the share of crypto-asset (re)insurance coverage undertakings accounts for simply 655 million euros or 0.0068% of all undertakings in Europe — even referring to it as “immaterial.”
“On the similar time crypto belongings are excessive danger investments which can end in complete lack of worth,” EIOPA stated, explaining why it recommends choice three.
Luxembourg and Sweden might be hit hardest by the proposed rule
Insurers in Luxembourg and Sweden are prone to be essentially the most affected, in keeping with a This autumn 2023 report cited by EIOPA, which discovered that these two international locations accounted for 69% and 21% of all crypto asset-related exposures amongst (re)insurance coverage undertakings.
Eire, Denmark and Liechtenstein additionally accounted for 3.4%, 1.4% and 1.2% of the undertakings.
Most of those undertakings are structured inside funds, resembling exchange-traded funds, and held on behalf of unit-linked policyholders, EIOPA famous.
Cut up of crypto-asset publicity proxy per European nation in This autumn 2023. Supply: EIOPA
EIOPA, nevertheless, acknowledged {that a} broader adoption of crypto belongings sooner or later could require a extra “differentiated strategy.”
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