EU watchdog wants insurers’ crypto holdings 100% covered, citing volatility
The European Union’s insurance authority recommended the broad policy change, noting the “inherent risks and high volatility” of cryptocurrency.
The European Union’s insurance body has suggested a blanket rule requiring insurance companies to keep capital equal to the amount of their cryptocurrency holdings as part of a risk mitigation strategy for policyholders.
The latest recommendation, presented by the European Insurance and Occupational Pensions Authority in a Technical Advice report to the European Commission on March 27, would establish a significantly higher bar than other asset types, such as equities and real estate, which do not even need to be half-baked.
“EIOPA considers a 100% haircut in the standard formula prudent and appropriate for these assets given their inherent risks and high volatility,” according to an additional statement.
According to EIOPA, such a move would bridge the regulatory gap between the Capital Requirements Regulation and the Markets in Crypto-Assets Regulation (MiCA), as the European Union’s regulatory framework for insurers currently lacks explicit rules on crypto assets.
EIOPA proposed four possibilities for the European Commission to consider: One option is to make no modifications; another is to mandate an 80% “stress level” for crypto assets; and third, to mandate a 100% stress level for crypto assets.
The stress level percentages define how much capital enterprises must hold to be solvent.
The fourth alternative urged the European Commission to take a broader view of the dangers associated with tokenized assets.
“An 80% stress to the value of crypto-asset exposures does not appear sufficiently prudent,” however, “a 100% stress is more appropriate and aligns with one of the approaches to the transitional treatment of crypto-assets under CRR,” EIOPA reported.
The 100% stress refers to the premise that crypto asset prices could fall by 100% and that diversification, or spreading the risk across other assets, would not ameliorate this impact. According to EIOPA, Bitcoin (BTC) and Ether (ETH) prices have dropped by 82% and 91%, respectively, in the previous.
According to EIOPA, a 100% capital fee for crypto asset-related (re)insurance undertakings should not be “overly burdensome” and would result in no significant costs for policyholders.
“The capital requirements would fully capture the risk of crypto-asset with a positive impact on policyholder protection in case there are material exposures in the future.”
EIOPA admitted that the share of crypto-asset (re)insurance undertakings accounts for only 655 million euros, or 0.0068% of all undertakings in Europe, describing it as “immaterial.”
“At the same time, crypto assets are high-risk investments that may result in total loss of value,” the EIOPA stated, explaining why option three is recommended.
Luxembourg and Sweden could be hit hardest by the proposed rule
According to a Q4 2023 assessment quoted by EIOPA, insurers in Luxembourg and Sweden are projected to be the most affected, accounting for 69% and 21% of total crypto asset-related exposures among (re)insurance undertakings, respectively.
Ireland, Denmark, and Liechtenstein were also responsible for 3.4%, 1.4%, and 1.2% of the projects. According to EIOPA, the majority of these transactions are arranged within funds, such as exchange-traded funds, and are held on behalf of unit-linked policyholders. However, EIOPA acknowledged that future acceptance of crypto assets may necessitate a more “differentiated approach.”
Crypto-asset investments are high-risk; you may lose your capital