Last week, HANFA held the latest Council session. In it, they discussed the influence of the Euro introduction on the insurance sector, the UCITS funds, the Stock Exchange as well as the influence of the Russian invasion of Ukraine on the financial markets thus far.
The regulator said that during the meeting, the Council was presented with the results of the market exercises to assess the impact of the euro introduction, which were held by the insurance companies in 2020 and 2021 according to HANFA’s instructions and methodological approach. Due to the introduction of the euro, insurers will have to adjust the methodological approach for calculating the SCR (the ratio of eligible own funds and required solvency capital). This means that the insurers will have to take into account the assumptions in the Eurozone, which are in many ways different from the assumptions currently used by the insurance companies. The change in these assumptions will automatically lead to a change in the own funds as well as the required capital for the solvency of these companies.
After these market exercises were done, it was concluded that the introduction of the euro will reduce the solvency ratio of the insurance companies. Considering that at the end of 2021, it stood at 209%, (meaning that the insurance companies held more than 2x the required funds to be solvent), it is expected to drop somewhat but still remain just above 200%. Insurance companies that would be more directly affected by the euro change have already defined their plans for the improvement of their solvency position for 2022, and HANFA will continue monitoring their progress in this regard.
Changes to UCITS funds were also discussed. The regulator intends to incorporate the EU UCITS Level 2 Directive and AIFMD Level 2 Regulation, which would mean that in the EU, the assets of inv. funds and retail investors will no longer have to pay excessive costs. The regulator also points out that it is monitoring the costs of investments into UCITS funds, through the national 3.5% limit on costs of the average annual net asset. On this point, it was recognized that there was a lack of documentation of the pricing process itself, as well as the lack of internal acts that regulate and prescribe the process. Therefore, the framework and control of the prevention of excessive costs towards investors will additionally be determined through amendments to legal acts and drafting of Guidelines on costs and fees to inv. funds.
The impact on the ZSE was also discussed. Firstly, there would be increased costs due to the introduction. Secondly, the reactions of the market on the start of the settlement of the CCP transactions, of which it was said that the system is functioning properly, but should also expand to include the lending of securities and increasing the volume of trading in shares on the domestic market.
Finally, the Council discussed the impact of the Russian invasion of Ukraine on the financial market. According to the first analysis, sanctions against Russia and Belarus, as well as previous investment, do not affect the current financial stability of the non-banking sector (mostly consisting of pension, insurance and investment funds). Because of the existing legal restrictions, mandatory and voluntary pension funds do not have direct investments in Russian, Belarusian or Ukrainian debt securities and money market instruments. Also, pension funds invest long-term, meaning that short-term shocks shouldn’t affect them in the long run, especially after the situation normalizes.