The European Union’s insurance authority has introduced a significant proposal requiring insurance firms to maintain capital equal to the full value of their crypto holdings. This mandate aims to mitigate the risks posed to policyholders in light of the volatile nature of cryptocurrency.
The new proposal, revealed by the European Insurance and Occupational Pensions Authority (EIOPA) on March 27, establishes a stricter standard than that applied to other asset classes. While stocks and real estate may not require stringent capital backing, EIOPA suggests a 100% haircut for cryptocurrencies to account for their high volatility and associated risks.
In its statement, EIOPA noted, “A 100% stress is more appropriate and aligns with one of the approaches to the transitional treatment of crypto-assets under the Capital Requirements Regulation (CRR).” This reflects an understanding that crypto asset prices could potentially fall to zero without the possibility of risk mitigation through diversification.
The implications of such a regulation could be far-reaching, especially for insurers in Luxembourg and Sweden, which represent a significant proportion of crypto asset-related exposures among (re)insurance undertakings. According to EIOPA, Luxembourg and Sweden account for 69% and 21%, respectively, of these exposures.
While the proposed capital requirements will not impose significant costs on policyholders, they are expected to enhance protections in case of material exposures in the future. As the landscape of crypto assets continues to evolve, EIOPA recognizes that further considerations may be necessary for broader adoption within the insurance sector.