The Opinion of EIOPA on the Solvency II review on Guidelines

24 February 2021
Knowledge Base

On 17 December 2020, EIOPA published its “Opinion on the 2020 review of Solvency II” together with an extensive Background analysis. In its Opinion, EIOPA formulates proposals to amend the L1 Solvency II framework directive (SII FD) as well as the L2 Solvency II Delegated Regulation. However, EIOPA also opines that certain clarifications can be given, not only via amending the SII FD or the Delegated Regulation, but also through additional guidance or the issuance of new EIOPA guidelines. In the meantime, the Commission and other stakeholders are reading and analysing EIOPA’s Opinion. I decided in this blog to focus on EIOPA’s suggested use of guidelines in the review.

Changing existing guidelines

The purpose of the Guidelines is to establish consistent, efficient and effective supervisory practices and to ensure common uniform and consistent application of Union law. Since its existence, EIOPA has issued 30 sets of Guidelines related to Solvency II, each containing several (sub)guidelines. Guidelines are currently existing in several of the areas mentioned where EIOPA suggests further additions or changes.

Article 16, 2a of the EIOPA Regulation, as amended in 2019, provides that guidelines shall not merely refer to, or reproduce, elements of legislative acts, but that before issuing new guidelines, EIOPA must first review existing guidelines in order to avoid any duplication.

This rigorous test should be applied with every set of Guidelines. Preferably, Union law – i.e. the SII FD and the L2 Delegated Regulation – should be formulated as crystal clear as possible so as to avoid the need for guidelines ‘to ensure a common uniform and consistent application of Union law.’ Making the framework lean is also a form of proportionality.

We identified several areas where EIOPA argued for changing guidelines. These include by way of example the Guidelines on treatment of related undertakings, including participations; the Guidelines on valuation of technical provisions; the Guidelines on application of outward reinsurance arrangements to the non-life underwriting risk sub-module; the Guidelines on reporting and public disclosures; the Guidelines on own risk and solvency assessment, etc…

In the Background analysis, Annex 8.6, titled “Draft proposal for enhanced use of proportionality in the Solvency II Directive – Article 35 of the Solvency II Directive amendments”, EIOPA adds a revised text of the existing EIOPA Guidelines on the methods for determining the market shares for reporting. The Guidelines on determining the market share for reporting were issued in 2015. This is the only instance where EIOPA in its Opinion and Background Document goes as far as including the complete text of the possible revision of existing Guidelines in line with its opinion of the L1 text changes. It did not include any draft Guidelines text related to the other areas mentioned.

Drafting new guidelines

EIOPA suggests new guidelines for example in the new area of ‘low risk undertakings’ (as part of its proportionality proposals). In the new macro-prudential policy area, we could identify eight potential new guidelines such as guidelines to further specify the scope of undertakings subject to systemic risk management plans, or guidelines to specify when undertakings would be exempted from drafting a liquidity risk management plan, or guidelines to further specify the existence of “exceptional circumstances” regarding the temporary freeze on redemption rights of policyholders.

Upgrading existing guidelines

In addition, EIOPA also suggests in its Opinion to hard wire some of the guidelines it issued in the past, mainly to the Delegated Regulation. We could identify four instances where EIOPA made such a suggestion. In its Background analysis EIOPA explains that a guideline, due to its legal nature and scope, cannot address gaps of a regulatory nature. Therefore, EIOPA continues, an effective solution to support a level playing field would be better addressed in the L2 legislation.

A few observations on the need to use Guidelines parsimoniously

A residual choice

According to consideration (25) of the EIOPA Regulation, “in areas not covered by regulatory or implementing technical standards, the Authority should have the power to issue guidelines and recommendations on the application of Union law.  Is the choice of issuing Guidelines not a residual choice, to be restrictively interpreted, as preference should go to L1 and L2 robust texts?

A less than ideal tool

It is interesting to note that EIOPA in its comments on the Guidelines on Basis Risk writes in the Background analysis “And even though the undertakings shall make every effort to comply with the guidelines and recommendations, cf. 1.16 of Guidelines on basis risk, NSAs cannot use the guidelines as a legal basis to object to undertakings’ use of certain risk-mitigating instruments.” This makes the Guidelines a less than ideal tool to achieve supervisory convergence, and is in a way contradictory: use guidelines to achieve convergence, but as guidelines cannot be enforced, convergence cannot be guaranteed to be reached.

An area where there could be further debate is related to the detail of exceptional circumstances if and when supervisory authorities are granted the power to temporary freeze redemption rights of policyholders, linked to, or preceded by, the prohibition of distributing dividends, bonuses and other means of variable remuneration to management or shareholders. The confusion around the recent distribution related supervisory statements and statements of EIOPA, in nature as non-binding as guidelines, should maybe work as a reminder that guidelines may not be the solution. Again, EIOPA’s own wording that NSAs cannot use the guidelines as a legal basis to object should be a valid reminder.

Union law is the prerequisite

Is it in line with the framework to have guidelines specifying when undertakings would be exempted from drafting a liquidity risk management plan or to decide on the scope of the undertakings subject to systemic risk management plans (SRMP)? Are scope issues not a L1 item?

Guidelines are not an alternative for technical standards

Regarding macro-prudential policy, EIOPA suggests a capital surcharge for systemic risk as a separate pillar 2 tool to be used at the discretion of the supervisory authorities. This is a novel area for insurance supervisors, thus EIOPA. But should such solution be retained by the Commission, it would also be a novel area for insurance legislation. EIOPA would like – in order to assist consistent conditions of application and avoid inconsistent use across the EU – to have either technical standards or guidelines on the procedures for decisions to trigger, set, calculate and remove capital surcharge for systemic risk. But technical standards and guidelines are not interchangeable. This part of the Opinion seems to suggest that if the Commission doesn’t come up with technical standards, EIOPA will work out the procedures via guidelines, either way. But are procedures not the prerequisite of technical standards?

Timeline for potential changes to the Guidelines or new Guidelines

Given the timeline of the Solvency II review, and the requirement of Article 16a of the EIOPA Regulation, is it reasonable to expect that adapted and/or new Guidelines will only be available after the reviewed SII FD has been agreed and the Delegated Regulation has been reviewed too, under the proviso that the guideline option is retained by the Commission, and accepted by the co-legislators? Are we talking 2026?

This blog article is a short version of a longer article into this matter. For more information on the longer article, please contact the author, Lieve Lowet.

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