CEA comments on key Solvency II issues

The CEA, the European insurance and reinsurance federation, has responded to two consultation papers issued by the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops). The consultations relate to the aspects of the EC's proposed Solvency II Framework Directive that concern the supervision of insurance groups and the principle of proportionality.

The CEA's comments aim to contribute to the creation of a prudential regime that is based on an economic approach and is therefore suitable for the whole EU market, irrespective of an insurer's size or legal form. The appropriate application of the proportionality principle and the creation of an economic-based supervision of groups are critical in this regard.

Insurance groups

Group supervision and the group support regime are important cornerstones of the Solvency II regime and intend to mark the introduction of an innovative approach to group supervision, which stands on the same footing of solo supervision. Under Solvency II, group supervision should be based on effective cooperation and trust between supervisors and should focus the economic reality of insurance groups. The group support regime is a transparent and secure tool that allows the efficient allocation of capital across a group and the recognition of group diversification effects.

The CEA is fully supportive of the new approach to the supervision of insurance groups as proposed by the EC. However, Alberto Corinti, CEA deputy director general, warned: "The CEA is concerned that if some aspects of Ceiops advice were adopted, the objectives of the group support regime would be undermined.

"The CEA recognises that Ceiops has made significant efforts to address the technical questions arising from the group support regime and acknowledges that some of its aspects deserve further clarification and fine tuning. Nevertheless, it urges Ceiops to reconsider some tentative conclusions which contain a fundamental misapprehension regarding the new regime. The CEA is willing to work further with all stakeholders to address these concerns and make this system a reality."

Proportionality

A key objective of Solvency II is to develop a proportionate, risk-based approach to supervision that is appropriate both for small companies and large, cross border groups.

"The CEA believes that proportionality is key to the successful implementation of Solvency II," said Corinti. "The principle of proportionality should apply to financial requirements, to the review of the risk management and governance processes, as well as to the disclosure requirements.

"Ceiops's draft advice goes in the right direction. We would, however, like to emphasise that the practical implementation of this principle in all three Pillars requires further work."

In respect of financial requirements, the CEA expects a large number of insurance companies to want to apply this principle by using simplifications for their business or parts of their business. This is because it expects that many low risk profile companies do not need to carry systematically sophisticated calculations.

In addition, the special features of many small and medium-sized insurers should be recognised. Failure to do so may result in an inappropriate capital charge for such companies. Practically, this means that, besides simplifications, some flexibility must be allowed within the standard approach for companies to use their own data.

"We believe that QIS4 will be a very useful starting point to gain more experience on how to apply simplifications for insurance liabilities and capital requirements, while maintaining the target level of protection. Requirements and supervisory interventions should be risk-based and not be unduly influenced by the size or legal form of the company," said Corinti.

Own funds

The CEA has also published its position on the criteria set out in the Framework Directive Proposal for assessing the eligibility of insurers' own funds to cover the solvency capital requirement (SCR) and the minimum capital requirement (MCR).

The two responses on groups and proportionality and the own funds position paper are all available on the CEA website, www.cea.eu.

Timetable

On 17 July 2007 the EC called for advice from Ceiops on the treatment of groups and the principle of proportionality in its Solvency II proposal. On 25 February 2008 Ceiops issued two consultation papers:

CP24: Draft Advice on the Principle of Proportionality in the Solvency II Framework Directive Proposal; and

CP25: Draft Advice on Aspects of the Framework Directive Proposal related to Insurance Groups.

Ceiops requested comments on its draft advice by 25 April 2008 and is due to issue its final advice to the EC on both topics in May 2008.

Background

Solvency capital requirements for EU insurers have been in place since the 1970s. Following a review required by the third generation Insurance Directives of the 1990s, limited reforms, known as Solvency I, were agreed by the European Parliament and the Council in 2002. The European Commission adopted the Solvency II proposal for a more fundamental and wider ranging review in July 2007 and an amended proposal on 26 February 2008.

To help prepare for the development of Solvency II implementing measures, Ceiops has been asked to run quantitative impact studies. The fourth study, QIS4, runs from April to July 2008, with Ceiops due to publish its report on the results in November 2008.

The current Solvency II timetable envisages that the Directive will be adopted by the European Parliament and the Council in 2009 and transposed into law in Member States by 2012.

The CEA is the European insurance and reinsurance federation. Through its 33 member bodies, the national insurance associations, the CEA represents all types of insurance and reinsurance undertakings, eg pan-European companies, monoliners, mutuals and SMEs. The CEA represents undertakings that account for approximately 94% of total European premium income. Insurance makes a major contribution to Europe’s economic growth and development. European insurers generate premium income of €1 065bn, employ over one million people and invest more than €6 900bn in the economy.