The European Commission has proposed a ground-breaking revision of EU insurance law designed to improve consumer protection, modernise supervision, deepen market integration and increase the international competitiveness of European insurers.
Under the new system, known as ‘Solvency II’, insurers would be required to take account of all types of risk to which they are exposed and to manage those risks more effectively.
In addition, insurance groups would have a dedicated ‘group supervisor’ that would enable better monitoring of the group as a whole. The Commission aims to have the new system in operation in 2012. This proposal is part of the Commission’s Better Regulation strategy and its firm commitment to simplify the regulatory environment and cut red tape. It will mean replacing 14 existing directives with a single directive. The proposal now passes to the European Parliament and Council for consideration.
What ‘Solvency II’ would introduce
The new system would introduce more sophisticated solvency requirements for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents. This will help to increase their financial soundness. Currently, EU solvency requirements only cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer’s investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). All these risk types pose material threats to insurers’ solvency but are not covered by the current EU system.
Insurers would also be required to focus on the active identification, measurement and management of risks, and to consider any future developments, such as new business plans or the possibility of catastrophic events, that might affect their financial standing. Under the new system, insurers would need to assess their capital needs in light of all risks by means of the ‘Own Risk and Solvency Assessment’, while the ‘Supervisory Review Process’ (SRP) would shift supervisors’ focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems.
In addition, the new system would enable insurance groups to be supervised more efficiently, through a ‘group supervisor’ in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors. This would entail a more streamlined approach to supervision that would recognise the economic realities of such groups. The introduction of group supervisors would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.
Background
The aim of EU solvency rules is to ensure that insurance undertakings are financially sound and can withstand adverse events, in order to protect policyholders and the stability of the financial system as a whole. However, the current EU solvency system is over 30 years old and financial markets have developed dramatically in recent years, leading to a large discrepancy between the reality of the insurance business today and its regulation. Also, many Member States have introduced their own additional rules at national level, leading to a range of different regulatory requirements across the EU, which ultimately undermine the Single Market and especially hinder insurance groups. ‘Solvency II’ would replace this patchwork of different rules, ensuring a level playing field and a uniform level of consumer protection. It is in line with international discussions within the International Association of Insurance Supervisors (IAIS).
More information is available at:
http://ec.europa.eu/internal_market/insurance/solvency_en.htm
