The European Insurance and Occupational Pensions Authority (EIOPA), which oversees insurance in the European Union, has suggested a significant policy change that could significantly affect insurers that hold crypto assets. EIOPA wants to protect policyholders from digital currencies, high risk and volatility so it has suggested a 100% capital charge for crypto holdings. This is a lot tighter than the rules for stocks or real estate. If this rule were implemented, insurance companies would have to keep cash reserves equal to the amount of crypto they hold. This would mean they would have to treat crypto assets that could be lost entirely.
Crypto’s Volatility Requires Caution
In a Technical Advice report to the European Commission, EIOPA explains its plan for stricter capital requirements. This is because crypto assets are hard to predict. Crypto assets have been very volatile compared to standard investments like stocks (39% to 49% capital charge) or real estate (25%). The report says that price drops in the past, like when Bitcoin fell 82% and Ethereum fell 91%, are a big reason for the suggested 100% stress level.
Fourth Policy Options—100% Charge Most Prudent
EIOPA gave the European Commission four choices for how to set capital requirements for crypto assets:
- No change to the rules
- 80% level of stress on crypto assets
- 100% stress level on crypto assets (this is what the EIOPA suggests).
- A more extensive tokenized asset risk assessment
EIOPA disagreed with the 80% stress level because it didn’t fully reflect the risk of crypto.
Luxembourg and Sweden Most Affected by New Proposal
If the plan goes through, it will affect insurance companies in Luxembourg and Sweden since they hold 90% of all crypto-related insurance. There are also effects in Ireland, Denmark, and Liechtenstein, though their exposure is still low. EIOPA stressed that crypto-related (re)insurance is still a niche business that must be regulated before it grows too big.
Conclusion
EU is cautious about crypto assets in the insurance sector, and EIOPA’s suggested 100% capital requirement shows this. Some people may say the rules are too strict, but EIOPA says they are necessary to protect consumers and keep the system safe.
