The European Insurance and Occupational Pensions Authority (EIOPA) has proposed a strict rule for insurers in the European Union. Under the rule, the insurers would be required to hold capital equal to the value of all their crypto assets. The aim is to protect the policyholders from the high risks of such digital assets.
EIOPA released its technical advice to the European Commission today. The advice proposes a one-to-one capital requirement for EU insurers’ and reinsurers’ total investments. The regulator considers a 100% haircut to be suitable due to the riskiness and volatility of crypto investment.
Regulatory gaps in crypto insurance
Crypto assets are still a new financial category with uncertain regulations. The Capital Requirements Regulation Crypto assets are still an emerging asset class with ambiguous regulation. Interim prudential regulations have been provided by the Capital Requirements Regulation (CRR) and the Markets in Crypto-Assets Regulation (MiCAR).
However, there are no specific rules for insurers under the EU framework. This has led to the heterogeneous classification of holdings among insurers. The lack of harmonization presents risk management and financial stability risks.
EIOPA looked at historical data on crypto assets and concluded that current capital weight approaches underestimated the risks. For instance, an 80% stress level applies to intangible assets, but it is not sufficient to reflect volatility. The proposed rule tries to address this imbalance by making the treatment of crypto exposures more conservative.
The regulator wishes to create a standardized and conservative approach for insurers. The proposed 100% capital requirement would be used across the board, regardless of whether the exposure is direct or indirect. This would eliminate complexity and avoid further reporting demands on insurers. Presently, crypto investments by insurers are negligible, but this might not always be the case.
Evolving crypto regulations for insurers
EIOPA is aware that more extensive take-up of crypto assets could require changes in the future. The rules need to keep pace with market developments as well as regulatory solutions in other financial sectors. The treatment of crypto holdings under Solvency II will be revisited as the market develops.
The proposal highlights the EU’s cautious stance in introducing crypto assets into mainstream finance. Regulators continue to put stability and consumer protection first. Insurers must be prepared for stricter requirements if they are going to invest in assets.
The European Commission will now review EIOPA’s recommendations before deciding on further actions. The insurance industry must navigate the evolving regulatory landscape carefully. Crypto investments carry potential rewards but also significant risks. EIOPA’s proposal reinforces the need for strong safeguards to protect policyholders and maintain financial stability in the sector.
