The European Union’s insurance coverage authority has proposed a blanket rule that may 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 lessons, corresponding to shares and actual property, which don’t even should be half-backed.
“EIOPA considers a 100% haircut in the usual components prudent and applicable for these belongings in view of their inherent dangers and excessive volatility,” it mentioned in a separate assertion.
Such a measure would fill a regulatory hole between the Capital Necessities Regulation and Markets in Crypto-Belongings Regulation (MiCA), EIOPA mentioned, noting that the European Union’s regulatory framework for insurers at the moment 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 degree” to crypto belongings; and three: mandate a 100% stress degree to crypto asset.
The stress degree percentages decide how a lot capital companies want to carry to remain solvent.
The fourth choice referred to as on the European Fee to think about the dangers of tokenized belongings extra broadly.
EIOPA mentioned choice three could be essentially the most applicable choice.
“An 80% stress to the worth of crypto-asset exposures doesn’t seem sufficiently prudent,” whereas “a 100% stress is extra applicable and aligns with one of many approaches to the transitional remedy of crypto-assets underneath CRR,” EIOPA mentioned.
The 100% stress refers back to the assumption that the crypto asset costs may fall by 100% and that diversification — spreading the chance throughout completely different belongings — wouldn’t not cut back this stress. EIOPA identified that Bitcoin (BTC) and Ether (ETH) have fallen 82% and 91%, respectively, up to now.
A 100% capital cost for crypto belongings would mirror a far stricter strategy in comparison with shares, which vary between 39% and 49%, and actual property, which incurs a 25% capital cost, in response to solvency capital necessities specified by the Fee Delegated Regulation 2015/35.
EIOPA mentioned a 100% capital cost for crypto asset-related (re)insurance coverage undertakings shouldn’t be “overly burdensome” and that there could be no materials prices for policyholders.
“The capital necessities would totally seize the chance of crypto-asset with a optimistic 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 identical time crypto belongings are excessive threat investments which can lead to complete lack of worth,” EIOPA mentioned, explaining why it recommends choice three.
Luxembourg and Sweden may very well be hit hardest by the proposed rule
Insurers in Luxembourg and Sweden are prone to be essentially the most affected, in response to a This fall 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, corresponding to 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 fall 2023. Supply: EIOPA
EIOPA, nevertheless, acknowledged {that a} broader adoption of crypto belongings sooner or later might require a extra “differentiated strategy.”
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