EU Proposes 100% Capital Requirement for Insurers' Crypto Holdings

The European Union’s insurance authority has proposed a new rule that would require insurance firms to maintain capital equal to the value of their crypto holdings. This measure is aimed at mitigating risks for policyholders, given the high volatility and inherent risks associated with crypto assets. The proposal, made by the European Insurance and Occupational Pensions Authority (EIOPA) in a Technical Advice report to the European Commission on March 27, sets a far stricter standard than other asset classes, such as stocks and real estate, which do not 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. 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.

EIOPA outlined four options for the European Commission to consider. The first option is to make no changes, the second is to mandate an 80% “stress level” to crypto assets, and the third is to mandate a 100% stress level to crypto assets. 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. 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 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. 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.

Insurers in Luxembourg and Sweden are likely to be the most affected by the proposed rule, 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.

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