The supervision of run-off undertakings
On 23 July 2021, EIOPA issued a consultation on a potential new supervisory statement, focusing this time on the supervision of run-off undertakings. The aim of any supervisory statement is to ensure the application of high-quality and convergent supervision. Run-off undertakings or portfolios are unabridged subject to the Solvency II (SII) prudential framework in which no specific provisions are foreseen for these “insurance undertakings”. In a dynamic and competitive European insurance market where it should be possible for players to come and go, a clear framework for run-off undertakings seems logical. In addition, there is an increasing interest in the acquisitions of run-off portfolios and run-off undertakings by other insurance undertakings and specialised investment entities such as private equity. Therefore, one could argue that, because the SII framework is lacking a specific regulation, this void needs to be filled. Does this mean that the proportionality principle is not specific enough to deal with particularities of nature, size and complexity?
Article 13 of the SII directive, “Definitions” does not include a definition of the term “run-off” undertakings. EIOPA, in its draft supervisory statement, describes a variety of situations where the insurance undertaking has stopped underwriting new business. The term run-off undertaking may refer to different cases:
- Undertakings running-off a portfolio of contracts not representing their whole business (partial run-off undertakings or undertakings with a material run-off portfolio);
- Undertakings running-off their whole (previous) business (full run-off undertakings or undertakings with legacy portfolios);
- Undertakings with a run-off business model (specialised run-off undertakings) to which insurance undertakings transfer their legacy portfolios for run-off.
In essence, it are portfolios or undertakings closed for new underwriting business.
EIOPA therefore believes that it is essential to specify supervisory expectations to better consider and deal with potential risks regarding run-off business models. One of the reasons EIOPA highlights as particularly challenging for supervision of run-off undertakings is the specific risk profile of such undertakings for example in relation to the changes in ownership. Hence, the draft supervisory statement covers the authorization of acquisition of run-off undertakings or portfolios, as well as the ongoing supervision and prudential and conduct of business issues. In particular, EIOPA recommends any potential acquirer an early dialogue with national supervisory authorities (NCAs) to communicate its intention regarding the run off of the full (or material) part of insurance obligations. “If there are doubts about the financial capacity of the acquirer, the supervisory authority may ask the acquirer to provide collateral to back up the commitment.” Another area of concern is the investment horizon of private equity partners, usually shorter than more traditional shareholders, and supervisors should assess the potential and consequences of early withdrawal from the investment. Also complex group structures of legacy platforms may make life difficult for supervisors.
As part of the ongoing supervision, NCAs should perform a business model analysis with a specific focus on how the undertaking is expected to remain profitable in the near future. Furthermore, the focus should also be on ensuring the compliance with SII rules such as technical provisions, investments, reinsurance, governance and at the same time making sure that policyholders are (continued to be) treated fairly. The draft also pays attention to conduct of business supervision, including POG provisions.
EIOPA invites all interested stakeholders to provide comments to the supervisory statement by responding to the survey by 17 October 2021.
EIOPA’s other Supervisory Statements of 2021 are the Supervisory Statement On Supervisory Practices And Expectations In Case Of Breach Of The Solvency Capital Requirement (8 pages), adopted on 12 June 2021, and the Supervisory Statement on ORSA in the context of COVID-19 (5 pages) adopted on 16 June 2021.
According to EIOPA’s Supervisory convergence plan, supervisory convergence is not only achieved through training, networking and visits among supervisors, but also through supervisory guidelines and recommendations (Article 16 of the EIOPA Regulation); opinions (Article 16a); questions and answers (Article 16b); the Supervisory Handbook (Article 8,1(aa) and Article 29,2, 2nd par); supervisory statements, public best practices and reports (Article 29,2, 1st par), all public sources (except the Supervisory Handbook). Any tool issued in compliance with Article 29,2 shall also analyse potential costs and benefits.