The European Union’s insurance authority has proposed a blanket rule that would mandate insurance firms to maintain capital equal to the value of their crypto holdings as part of a measure to mitigate risks for policyholders.

The new proposal — made by the European Insurance and Occupational Pensions Authority in a Technical Advice report to the European Commission on March 27 — would set a far stricter standard than other asset classes, such as stocks and real estate, which don’t even need to be half-backed.

“EIOPA considers a 100% haircut in the standard formula prudent and appropriate for these assets in view of their inherent risks and high volatility,” it said in a separate statement.

Such a measure would fill a regulatory gap between the Capital Requirements Regulation and Markets in Crypto-Assets Regulation (MiCA), EIOPA said, noting that the European Union’s regulatory framework for insurers currently lacks specific provisions on crypto assets.

Circle argued in January that a blanket 100% stress factor on crypto assets didn’t account for lower-risk stablecoins. Source: Circle

EIOPA outlined four options for the European Commission to consider — one: make no changes; two: mandate an 80% “stress level” to crypto assets; and three: mandate a 100% stress level to crypto asset.

The stress level percentages determine how much capital firms need to hold to stay solvent.

The fourth option called on the European Commission to consider the risks of tokenized assets more broadly.

EIOPA said option three would be the most appropriate option.

“An 80% stress to the value of crypto-asset exposures does not appear sufficiently prudent,” whereas “a 100% stress is more appropriate and aligns with one of the approaches to the transitional treatment of crypto-assets under CRR,” EIOPA said.

The 100% stress refers to the assumption that the crypto asset prices could fall by 100% and that diversification — spreading the risk across different assets — wouldn’t not reduce this stress. EIOPA pointed out that Bitcoin (BTC) and Ether (ETH) have fallen 82% and 91%, respectively, in the past.

A 100% capital charge for crypto assets would reflect a far stricter approach compared to stocks, which range between 39% and 49%, and real estate, which incurs a 25% capital charge, according to solvency capital requirements laid out in the Commission Delegated Regulation 2015/35.

EIOPA said a 100% capital charge for crypto asset-related (re)insurance undertakings shouldn’t be “overly burdensome” and that there would be no material 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.”

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EIOPA acknowledged that the share of crypto-asset (re)insurance undertakings accounts for just 655 million euros or 0.0068% of all undertakings in Europe — even referring to it as “immaterial.”

“At the same time crypto assets are high risk investments which may result in total loss of value,” EIOPA said, explaining why it recommends option three.

Luxembourg and Sweden could be hit hardest by the proposed rule

Insurers in Luxembourg and Sweden are likely to be the most affected, according to a Q4 2023 report cited by EIOPA, which found that these two countries accounted for 69% and 21% of all crypto asset-related exposures among (re)insurance undertakings.

Ireland, Denmark and Liechtenstein also accounted for 3.4%, 1.4% and 1.2% of the undertakings. 

Most of these undertakings are structured within funds, such as exchange-traded funds, and held on behalf of unit-linked policyholders, EIOPA noted.

Split of crypto-asset exposure proxy per European country in Q4 2023. Source: EIOPA

EIOPA, however, acknowledged that a broader adoption of crypto assets in the future may require a more “differentiated approach.”

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