The European Insurance and Occupational Pensions Authority (EIOPA) has proposed that insurance companies fully back their crypto holdings with equivalent capital reserves. This is aimed at reducing risks for policyholders amidst the high volatility of the crypto market.
EIOPA's Proposal and Justification
EIOPA argues that cryptocurrencies are significantly riskier than traditional assets like stocks or real estate. As a result, the regulator finds a 100% capital requirement necessary to shield insurers from potential losses. This would require insurers to hold an equivalent amount in reserve for every euro held in crypto.
Options for the European Commission
EIOPA has outlined four possible paths for the European Commission to consider. One option involves maintaining the status quo. Another proposal involves an 80% capital requirement, which would require insurers to hold reserves covering 80% of their crypto exposure. The third option, the strictest, involves a 100% capital requirement. The final option suggests a broader review, assessing the risks of all tokenized assets.
Most Exposed Countries
Crypto exposure in Europe’s insurance industry remains small. However, Luxembourg and Sweden are the most exposed, holding 69% and 21% of all crypto-related insurance investments. Other affected nations include Ireland (3.4%), Denmark (1.4%), and Liechtenstein (1.2%).
Despite the small proportion of cryptocurrency investments by European insurers, EIOPA's proposal for full capital reserves underscores growing concerns about the volatility and risks of the crypto market. The European Commission must consider the proposed options to ensure robust protection for insurers and their clients.
