Insurance regulators in Europe want 100% coverage of crypto assets – that’s what it means

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The European Insurance and Occupational Pension Administration (EIOOPA) has proposed a new regulation requiring insurers to maintain capital equivalent to the full value of their cryptocurrency holdings.

The recommendation, which was included in the 27 March technical recommendation report to the European Commission, reflects the growing concern about volatility and risks associated with digital assets.

Policy recommendations and potential impacts

Unlike traditional assets such as stocks or real estate, these assets require insurers to hold only a portion of their capital reserves, while cryptocurrency holdings will be subject to 100% capital expenses compared to their exposure.

EIOOPA said this conservative approach is reasonable due to the high volatility of assets such as Bitcoin and Ethereum, which previously dropped to more than 60% respectively.

The proposal aims to fill the “regulatory gap” (MICA) between the current Capital Requirements Regulation (CRR) and the Crypto Asset Management Regulation (MICA), neither of which fully address the risk of cryptoassets for insurers.

In its report, EIOPA proposed four policy options for consideration by the European Commission. The first option suggests no regulatory changes, while the second and third propose to set 80% and 100% “stress levels” as crypto assets, suggesting that the proportion of capital insurers must be retained to compensate for potential losses.

The fourth option suggests that regulators also evaluate the wider risks posed by labeled assets. EIOOPA endorses the third option and believes that 100% stress levels can better align with transitional treatments under Capital Requirements Regulation (CRR) and more accurately reflect the downside risks of cryptocurrency exposure.

According to EIOPA, this approach will ensure protection from strong policyholders without causing excessive fees for insurers, as cryptocurrencies currently account for only 0.0068% of all insurance operations in the EU.

Data for the fourth quarter of 2023 showed that insurance companies in Luxembourg and Sweden held most cryptocurrencies, accounting for 69% and 21% respectively. Other smaller but notable countries include Ireland (3.4%), Denmark (1.4%) and Liechtenstein (1.2%).

Most of these risks are established in investment instruments, such as exchange-traded funds (ETFs) and held on behalf of policy holders linked to the unit.

Prospects and regulatory environment

EIOPA notes that while the number of current cryptocurrency holders is small, future adoptions of insurers may require a more nuanced regulatory approach.

While digital assets are attracting attention, especially in investment products related to policyholder accounts, their inherent volatility presents unique risks that are different from traditional asset classes.

The ongoing mica implementation in the EU is expected to provide clearer guidance for the entire cryptocurrency sector, but the proposal made by EIOOPA notes that insurance-specific safeguards will also be prioritized.

Regulators stress that 100% capital requirements should not be considered as excessive restriction, especially given the current low levels of cryptocurrency exposure. Instead, the recommendation is considered a preventive measure to ensure solvency and protect policyholders in the event of a market shock.

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