Lieve Lowet

Lieve Lowet

EU Affairs consultant and lobbyist

Solvency II does not aim at protecting economic operators: Will the IRRD do?

25 May 2023
Knowledge Base

In 2021, the EFTA Court delivered an interesting judgment. Maybe it passed unnoticed as COVID was still raging through our normal working habits. But in the context of the current Solvency II (SII) review, including the proposed new Insurance Recovery and Resolution directive (hereafter IRRD), it might be useful to read this case again. The case concerned two French non-life insurance undertakings who sought to hold the Liechtenstein Financial Supervisory Authority (FMA) liable for failing to fulfil its supervisory obligations towards a Liechtenstein insurer who became insolvent, and who was in three capacities a creditor to the French insurers. The claimants were thus not insured persons under an insurance contract or a policyholder of the Liechtenstein insurer.

The claimants argued that the FMA was ultimately responsible for the losses incurred by the claimants as a result of the insolvency of the Liechtenstein insurer. (At the time of the case, the insolvency proceedings against the Liechtenstein insurer were still pending).

The Princely Court of Appeal in Liechtenstein concluded that the claimants were not covered by the protective purpose of the SII directive or its predecessor directives, the non-life directives of 1973, 1988 and 1992 (or the Liechtenstein legislation which transposed the SII directive in Liechtenstein law).

The Supreme Court of the Principality of Liechtenstein, having to decide on the appeal brought by the two French insurers, asked the EFTA Court for an advisory opinion on two questions. The first question related to Articles 27 and 28 of the SII directive (and their predecessor non-life directives).  Pro memoria, Article 27 concerns the main objective of supervision, namely the protection of policyholders and beneficiaries. Article 28 concerns the potential impact on financial stability and the potential effects on pro-cyclicality which supervisory authorities have to consider in the exercise of their general duties. The claimants argued that these two articles confer rights to economic operators, even if the operators are not policyholders, insured persons, beneficiaries or another party to an insurance contract, and that these articles can be the basis for liability claims against a supervisory authority. The second question related to the national implementation of the relevant EEA law and was only relevant if the first question would be answered positively.

The EFTA Court in Case E-5/20 decided that the liability of a supervisory authority regarding its failure to fulfil its obligations under EEA law must be assessed on the principle of State liability. One of the conditions for State liability to kick in is that the rule of law infringed must be intended to confer rights on individuals and economic operators.

Prior to the entry into force of the SII directive, the predecessor directives contained harmonised rules for the insurance market. According to the request, the Liechtenstein insurer was granted authorisation to pursue non-life insurance activities on 23 December 2005 until insolvency proceedings were opened on 17 November 2016. Consequently, the predecessor directives were relevant for assessing whether EEA law conferred rights on economic operators. The Court answered that none of the predecessor directives provided for an express rule to the effect that economic operators should benefit from particular protection under supervisory obligations. Recital 2 of the First Non-Life Insurance Directive does mention protection for insured persons and “third parties”. However, neither the Second nor the Third Non-Life Insurance Directives provided for any specific rights to such parties. Furthermore, recitals 17, 19 and 21 of the Third Non-Life Insurance Directive indicated that the predecessor directives were mainly intended to protect policyholders and insured persons, in addition to seeking harmonisation in the field of insurance. There was no intention to protect creditors or other economic operators.

So then, does the SII directive give rise to any State liability claim against a supervisory authority in the case of a failure? This is in the context of today’s SII review an interesting question. The Court found that the SII directive does not intend to guarantee against insolvency or the winding-up of insurance undertakings. In his book, Solvency Requirements for EU insurers, 2019, Karel Van Hulle writes: “Solvency II is therefore not a zero-failure regime. This is not always sufficiently recognised. In many Member States, insurance supervisors still carry out their supervision with the objective of preventing all insurance failures. Although this objective is very laudable, it often involves the introduction of additional prudence into the system, for instance by requiring a solvency ratio that is well above 100% (…). This is not necessarily in the interest of policyholders and beneficiaries because it makes insurance more expensive. It would be good for the law to state clearly that supervisory authorities cannot guarantee that (re)insurance undertakings under their supervision can never fail and that it is not the objective of insurance supervision to ensure this. This is the reason why, from a conceptual point of view, it makes a lot of sense to combine a risk-based solvency capital regime with the additional protection provided by an insurance guarantee scheme. As long as there is no insurance guarantee scheme in all Member States, there is a risk that the cost of carrying out insurance in the EU is hampered by unintentionally high solvency requirements.”

The Court answered further that it doesn’t follow necessarily from the fact that a directive imposes surveillance obligations on certain bodies that that directive seeks to confer rights on parties in the event that those bodies fail to fulfil their obligations. In addition, the claimants are neither parties to nor beneficiaries of an insurance contract. “Such economic operators cannot, in circumstances such as those of the main proceedings, be considered policy holders or beneficiaries within the meaning of the Directive.” The purpose of supervision, in this context, is not for the protection of individual economic operators, but the public interest in general. “

Thus, it concluded, the SII directive does not give rise to any State liability claim against a supervisory authority.

The proposed IRRD, when adopted, might probably change this as it hails the ‘no creditor worse off’ principle. If the proposed IRRD would have been incorporated in EU law at the time the French insurers brought their case before the Liechtenstein courts, the outcome would most likely have been different. The fact that the claimants were insurers is actually irrelevant: it could have been any creditor of the insurance undertakings. Is that what the IRRD aims for?

Lieve Lowet

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