Lieve Lowet

Lieve Lowet

EU Affairs consultant and lobbyist

The Solvency II review – How to safeguard the internal market in insurance? (Part 1)

18 July 2022
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Since the introduction of Solvency II, there have been very few failures in the insurance sector. Because some failures had cross-border consequences, there has been pressure to change the present regulatory regime in order to give more powers to host supervisors and to EIOPA. Although the functioning of the internal market in insurance can certainly be improved, care must be taken not to overload the barge and to respect the approach that was agreed in the nineties for all financial service operators, i.e. a single market with a single license (European passport) and home country control. Failures are in a way a proof that market mechanisms are working. But in the financial services area, failures are more undesirable than in the rest of the services sector, especially in a cross-border context exercised via the freedom of establishment or the freedom to provide services (FPS). Despite the fact that Solvency II was not conceived as a zero-failure regime and that few failures have occurred in practice, the European Commission, pushed by EIOPA, is proposing important amendments to the present regime for insurers that operate cross-border, justified by supervisory shortcomings and a varying degree of policyholder protection across the EU following these failures. This is part one of Lieve Lowet’s latest blog posts on Solvency II. Part 2 will be published this Wednesday.

Among other things, the current review of the Solvency II directive is therefore also trying to remedy those supervisory shortcomings by – grosso modo – attributing more competence to EIOPA and to the host supervisor. Is this the right direction? Is the idea of a Single Market not that what is correctly authorised in one Member State is valid across the entire Union? And is the idea not that in order to give this single license, a framework should be set up to which all undertakings and supervisors adhere? What will be the implications for other financial service areas and beyond where the Single Market principle has been the cornerstone of economic development? Will it contribute to a further development of the Single Market and a more competitive Union, or will it backfire and make the EU market less attractive?

According to EIOPA, there are today 3073 active domestic EEA (re)insurance undertakings, 7688 EEA branches, 21 third country branches, 6535 notifications of freedom to provide services cross-border for branches, and 14069 notifications of cross-border freedom to provide services, resulting in 24851 licenses and notifications. The new provisions the Commission proposes relate potentially to more than 18000 cases!

New requirements at the moment of authorisation

The European Commission is first proposing to amend the provisions on authorisation (Article 18) by introducing a requirement on applicants to provide information on previous rejections or withdrawals of authorisation in other Member States and the reasons for the rejection or the withdrawal, for three type of businesses. These are 1) direct insurance or reinsurance; 2) another regulated undertaking or 3) an insurance distributor. Regulated undertakings are, according to a new proposed definition, credit institutions, insurance undertakings or investment firms. There is no definition of insurance distributors. These provisions, besides being incoherently and incompletely defined, look innocent but are they really so? Are there similar requirements in the case of authorisation in other sectors of financial services? And if there are, what is the experience with such requirements? Did they reach the intended effect? And if not, why is insurance singled out? What will be the impact on other financial services sectors? This proposed ‘small’ change will certainly create a lot of bureaucracy.

In addition, it also introduces the obligation on supervisory authorities to take those failed or aborted requests into account in the assessment of applications and to notify each refusal of an authorisation, including the identification of the applicant undertaking and the reasons for refusal, to EIOPA, which will have to keep a database of these refusals only accessible to supervisors (Article 25). Accessible when? I guess, when supervisors examine a new request for authorisation with cross-border implications. Any cross-border implication? The proposed text is silent on this matter. Should this requirement make it more difficult to set up cross-border operations in certain jurisdictions? Has there been forumshopping in insurance? Where can we find the facts?

Furthermore, the home supervisory authority, i.e. the supervisor granting the EU wide single license, must also be informed about the markets in which the (re)insurance undertaking “intends to operate”, when applying for an authorisation (Article 23). Again, the provision is formulated broadly and without any reference to proportionality. Is this intended to put an end to the present practice of (re)insurance undertakings to notify all Member States in which they might want to operate without distinction – just to be on the safe side? The register of EIOPA of insurance undertakings, updated weekly (on Fridays), already includes an overview of all jurisdictions in which a (re)insurance undertaking is active via an EEA branch, EEA FPS or EEA FPS via a branch.

New requirements once authorised

Once authorised – and this will be valid for new authorisations as well as existing ones, the European Commission proposes to strengthen the cooperation between  home and host supervisory authorities, i.e. the supervisory authorities of the Member State(s) where a (re)insurer pursues activities via a branch or FPS, especially in the event of significant cross-border activities. Activities which occur cross-border (to be interpreted cumulatively or per each host Member State?) are significant, according to the European Commission, if the cross-border annual gross written premium exceeds 5% of the annual gross written premium of the undertaking, measured with reference to the last available financial statements of the undertaking. This is a very low threshold and merits reconsideration especially given the concerns many stakeholders have regarding proportionality. About how many thousand cases are we talking? What if the reinsurance ratio is high? By whom and when does this information about the amount of cross-border business have to be transmitted? By the undertaking in its supervisory reporting? But should home-host relevance not be a two-way street? When undermining the principles of the single market, the significance of cross-border activities should be more strictly and more seriously defined, as this concerns a very important exception.

In any case, when there are significant cross-border activities, the home supervisor will have to cooperate with the host supervisor to assess whether the (re)insurance undertaking concerned has a clear understanding of the risks it faces or may face in the host Member State, including at least governance elements such as risk management tools for the cross-border business, outsourcing arrangements and distribution partnerships, business strategy, claims handling, and consumer protection. This is a quite extensive list. Once that review is done by the home supervisor (for each host Member State) the (relevant) host supervisor must be informed if potential issues of compliance with the host Member State provisions have been identified (Article 33a). How will this work in practice? Home supervisors will have to develop a much deeper understanding of (all) host markets. How to avoid that home or host supervisors may have a conservative reflex (based on potential past experience)? Will these requirements have a dissuading effect to go cross-border? Will insurers of small Member States still ‘dare’ to enter larger Member States with “sophisticated” supervisors? What will be the effect on the liability of each supervisor in case something goes wrong? Why are these provisions not replicated for branches established within the Union but belonging to a (re)insurance undertaking with a head office situated outside the Union (Articles 162-163)? The extensive requirements will create a lot of work for supervisors and undertakings alike, especially for already existing authorisations (18000?). These newly proposed provisions are not just, as the European Commission writes in its Explanatory memorandum, “new minimum requirements regarding the exchange of information between the supervisory authorities in home and host Member States concerning the insurers and their activities in the host Member State”. These are serious new requirements which may put the Single Market idea under increased pressure.

Lieve Lowet, with a special thanks to Professor Van Hulle for the rereading of my draft.

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