The Solvency II review – Cooperation platforms and low risk undertakings and groups (Part 2)
Following changes in 2019 in the Solvency II directive, EIOPA has the power to set up and coordinate collaboration platforms to enhance collaboration between the relevant supervisory authorities where a (re)insurance undertaking carries out, or intends to carry out, cross-border activities based on the freedom to provide services or the freedom of establishment. For these platforms, the criterium is not significant cross-border activity from the point of view of the home supervisor, but relevance to the host Member State market. Around ten of these platforms have been set up since then. However, in several cases, according to the European Commission, supervisors have failed to reach a common view on how to address issues related to such cross-border business. Hence, the European Commission proposes to further enhance EIOPA’s role: the home supervisor must inform EIOPA and the relevant host supervisors if it identifies deteriorating financial conditions or other emerging risks which may have a cross-border effect. The host supervisor may notify EIOPA and the home supervisor if it has serious consumer protection concerns. The idea is to find a bilateral solution between home and host supervisors while EIOPA stands ready on the side Will that work? This is part two of Lieve Lowet’s latest blog on Solvency II (see related items for part 1).
In case of disagreement between home and host supervisors on content or procedure, EIOPA may, upon request or upon its own initiative, assist the supervisors concerned (Article 152b,5). In case of disagreement and serious concerns about the negative effects on policyholders in the host member state or about the content of an (in)action to be taken towards the (re)insurance undertaking, EIOPA may decide to initiate or coordinate on-site inspections to which the relevant supervisors are invited (Article 152b,6). The line between the changes of paragraphs 5 and 6 are however rather thin. How much distance will EIOPA take? Can we learn from the experience of colleges? Judging from the increased competences EIOPA has asked for, and received, in the case of group supervision and colleges, are the platforms developing into quasi-colleges?
Outside the cooperation platforms
The most contentious amendment to the current framework from the point of view of the Single Market principles is the proposed change to Article 153. The new article is titled “Timeframe and language of information request” but the flag doesn‘t cover the load. It introduces the potential for the host supervisor to require information from the home supervisory authority or directly from the insurance undertaking (not from a reinsurance undertaking), while informing the home supervisor that it is doing so. This provision is clearly a dent into the sacrosanct principle of home supervision and undermines the Single Market principle directly and unequivocally. In addition, no proportionality is enshrined in the article and no precondition of ‘relevance for the host market’ or ‘significant cross-border activity’ is foreseen unlike e.g. the amendments to Article 159a. Who will be the supervisors taking this up? The most audacious ones? The best staffed ones? And which insurer will refuse if a (powerful) supervisor knocks directly at its door?
The amendment to Article 159a adds further obligations for the home supervisors towards host supervisors: in case of significant cross-border activities, defined again as low as 5% of the annual gross premium written by the undertaking, the supervisory authority of the host Member State is empowered to request from the supervisory authority of the home Member State information on the solvency position of the undertaking and the home supervisor must submit such information. Also this requirement undermines the single license principle as it allows indirectly that the host supervisor looks over the shoulder of the home supervisor.
In case of strong concerns, i.e. in case of compliance issues with e.g. the MCR or SCR, and where the home Member State does not appropriately remedy the situation, the host supervisor may request to carry out a joint on-site inspection, with an obligation for the home supervisor, if it accepts the joint inspection, to invite EIOPA to participate. EIOPA should indicate as soon as practicable whether it intends to participate. Where supervisory authorities disagree on the opportunity to carry out a joint on-site inspection, EIOPA is given a role in resolving disagreements them.
While these amendments may seem reasonable for the uninformed reader, they are clearly a step in the direction of undermining the Single Market principle, making the Union less attractive and ultimately less competitive.
The case of the low risk undertakings
In the new proposals, the Commission introduces low risk undertakings (LRU), intended to benefit from some proportionality. However, according to Article 29a, one of the criteria to be classified as LRU is that maximum 5% of gross premium written is underwritten cross-border (probably both via branches, or via freedom to provide services). Or in case of a low risk group, with at least one non-life (re)insurance undertaking, business underwritten in Member States by subsidiaries other than in the home Member State is maximum 5% and additionally another 5% in case of cross-border activities via branches or freedom to provide services (the last two years). Interestingly, the requirement for low risk groups with only life insurance subsidiaries are focused on risk related criteria.
Do these provisions imply, according to the Commission, that cross-border activities are more risky? Is a group with only non-life cross-border business (both via subsidiaries and direct) more risky than a group which specialises in (cross-border) life insurance business? Where is the evidence? What is the underlying logic? Why can’t the logic of the low risk groups with only life insurance subsidiaries (Article 213a, 1(a)), a logic which is more in line with the overall framework, not be replicated ? Who is to benefit from this provision? Are we undoing what we build up so carefully during several decades?
While the co-legislators continue to do their (tortuous) work on the Commission’s proposed Solvency II review package, EIOPA in one of its recent Board meetings expressed unsurprisingly strong support for these European Commission’s proposals, especially in the case of collaboration platforms.
However, some supervisors were concerned about accountability and responsibility, especially when EIOPA is taking decisions that have an impact on national markets, ultimately the responsibility of the national supervisor. So, how far does EIOPA want to step in? For which end game is this proposal laying further stepping stones? Enforcement and supervisory powers in Member States are not fully harmonised at EU level (see for example EIOPA’s Report on the independence of national supervisory authorities, October 2021). Further analysis of the experience gained in the latest cases of cross-border failures seems necessary (to complete the assessment included in EIOPA’s Opinion on the 2020 Review of Solvency II, December 2020). And EIOPA’s own idea of potentially doing a survey about the use of emergency powers by host supervisors is a welcome addition before deciding on such important deviations from the Single Market concept.
In any case, the Commission’s proposals especially on the authorization requirements and the requirements outside the collaboration platforms are surprising: in May 2022, in its Report on the Operation of the European Supervisory Authorities, the Commission stated that it will continue to encourage the ESAs to make good use of the existing instruments while considering targeted improvements to foster supervisory convergence in sector legislation. In the Solvency II review proposal, it announced that it will (only) propose to increase the role of EIOPA in complex cross-border cases where the supervisory authorities involved fail to reach a common view in a collaboration platform.
Maybe we should reconsider Article 30: “The financial supervision of insurance and reinsurance undertakings, including that of the business they pursue either through branches or under the freedom to provide services, shall be the sole responsibility of the home Member State” and add: “The supervisory authorities shall conduct their tasks with a European vision”.
Lieve Lowet, with a special thanks to Professor Van Hulle for the rereading of my draft.