EIOPA’s draft advice calls for one-to-one capital weight for EU insurers’ crypto holdings

The European Insurance and Occupational Pensions Authority (EIOPA) launched a public consultation today on its draft technical advice on standard formula capital requirements for crypto assets within the EU’s regulatory framework for insurers. In response to the European Commission’s Call for Advice, EIOPA analysed EU insurers’ crypto holdings and the risk inherent in such holdings. In light of the findings of this analysis, EIOPA is proposing a 100% haircut to insurers’ crypto assets regardless of their balance sheet treatment and investment structure. As the market for crypto assets is still in its early stages and evolving, EIOPA recommends revisiting the prudential treatment of these assets in the future to determine whether a differentiated treatment would be appropriate.

Crypto assets are a relatively new assets class in finance and their regulatory treatment is still evolving. While the Capital Requirements Regulation (CRR) with its recent amendments and the Markets in Crypto-Assets Regulation (MiCAR) do include transitional prudential measures for crypto assets, the EU’s regulatory framework for insurers lacks specific provisions on crypto assets.

As a result, insurers currently classify their crypto assets without a consistent approach and there are concerns about the risk sensitivity of these practices and the level of prudence associated with them.

Crypto exposure and risks

European insurers’ investments in crypto assets are currently immaterial, with around €655 million or 0.0068% of their total investments of €9.632 trillion allocated to such assets. Reporting data shows that insurers’ crypto investments are typically structured within funds and held on behalf of unit-linked policyholders.

Nevertheless, the lack of transparency, low liquidity, and extreme price volatility of crypto assets, combined with the potential for broader future adoption and possible losses for policyholders necessitates careful regulatory and supervisory considerations.

Empirical analysis and policy proposals

Historical data for two of the largest crypto assets suggests that Solvency II’s current possible capital requirements for crypto holdings in fact underestimate the risks associated with crypto assets.

To promote a harmonized, prudent and proportionate treatment of crypto assets, EIOPA is proposing to introduce a 100% stress on crypto assets without diversification, regardless of their balance sheet treatment and irrespective of whether the exposures are direct or indirect.

Such an approach, in EIOPA’s opinion, would adequately reflect the high risk of these investments and introduce no unnecessary complexity or reporting requirements in the regulation.

The advice acknowledges that for some crypto assets, like asset-referenced tokens and electronic money tokens authorised under MiCAR, a differentiated treatment could be appropriate and suggests a review of the treatment in the future. 

Go to the Consultation Paper

Consultation

EIOPA invites stakeholders to provide their feedback on the Consultation Paper by responding to the questions via the online survey no later than 16 January 2025. All responses will be published on EIOPA’s website unless otherwise requested.