The European Union has legislated in relation to insurance services. As part of the freedom of movement of capital and freedom to provide services, there is legislation setting down common principles of insurance regulation.
An insurance company established and regulated in the state may provide services across borders or may establish itself in other EU states on the basis of regulation in the home country and consumer protection supervision in the host country.
A 2009 Directive on insurance and reinsurance seeks to create a legal framework enabling insurance and reassurance undertakings to provide services to the EU. It regulates non-life insurance, life assurance and reinsurance undertakings. The Directive sets out rules relating to
- taking up of self-employed activities of direct insurance and reinsurance;
- supervision of insurance and reinsurance groups;
- the reorganisation and winding up of direct insurance undertakings.
Insurance is divided into various classes under a common EU-wide classification. Companies are authorised for and in accordance with the classes. There are further specific directives and rules dealing with issues in respect of certain types of classes of insurance.
Insurance undertakings are not authorised to pursue life and non-life insurance activities simultaneously. However, undertakings life pursuing insurance activities may obtain authorisation to carry out restricted nonlife insurance activities (accident and sickness). Conversely, undertakings authorised for accident and sickness risk may obtain authorisation to carry out life assurance business.
EU Cross-Border Aspects
Each member state’s regulatory body must ensure adequate supervision of the insurance businesses it regulates. Adequate mechanisms must exist for the production of relevant information from each supervised insurer.
An insurance company which proposes to establish a branch within another EU state or intends to carry out its business in that state under the cross-border freedom to provide services must notify its home state and provide it with necessary information. The home authority notifies the host authority.
Insurers must appoint a representative in the member state through which services are provided responsible for collecting information and representing the insurer in relation to persons pursuing claims or seeking redress before the court or authorities. They may be required to verify the existence and validity of insurance cover.
Insurance companies must meet criteria in relation to their legal form, possess minimum guaranteed funds and provide information required by the monitoring authority. In the case of certain failures of compliance, authorities in the home state must inform authorities in the host state.
Agencies or branches established in the EU by head offices outside the EU may be authorised subject to meeting certain conditions. They must be authorised under national legislation and establish an agency or branch in the EU designating a general representative who must be approved by the regulator.
The competent authorities of other EU states may be asked to assist in providing verification of matters. Competent authorities must be informed of intergroup transactions which have significance.. Measures must be taken if the requisite degree of solvency cannot be guaranteed.
The regulators of the various states must work together and with the Commission in order to facilitate the monitoring of insurance companies.
Regulation and Prudential
Financial and prudential supervision is the responsibility of the home state authorities. They must monitor the entire business and must ensure that the requisite technical provisions are made, and that sound administrative and accounting procedures and controls are provided.
There are separate detailed directives for life and non-life insurance. The conditions of authorisation have been harmonised in the EU. The non-life insurance directive makes provision regarding technical provisions and solvency tests.
There are technical provisions in respect of
- claims and obligations.
- own funds obligations.
- solvency capital requirements
- minimum capital requirements
Insurance companies must make provisions for their liabilities and obligations calculated in accordance with actuarial assumptions and interest rates fixed by the authority in the home state. The information must be made available to the public as to the calculation of the required provision.
The value of assets must correspond to the amount for which they could be exchanged in a transaction. The liability is valued at the amount for which it could be transferred in a transaction.
Insurance companies must diversify their investments. There are thresholds in respect of which assets may be invested to cover the provisions. Insurance and reinsurance undertakings must only invest in assets and instruments whose risk can be easily identified.
Solvency / Capital
There must be an adequate solvency margin. This may comprise of certain assets. One-third of the solvency margin must constitute a guarantee fund which must be of a minimum amount. The guarantee fund is reviewed, and the competent authority must require a restoration plan if the guarantee fund is inadequate.
Technical provisions apply in relation to all insurance and reinsurance obligations to policyholders and beneficiaries of insurance and reinsurance contracts. The value of technical provision shall correspond to the amount the insurance and reinsurance undertakings would have to pay, if they were to transfer their insurance and reinsurance obligations, immediately to another undertaking. This is to be based on a best estimate and risk margin.
Own funds consist of the excess of assets over liabilities and subordinated liabilities; Ancillary own funds consisting of items other than basic own funds, which can be called up to absorb losses. Eligible basic funds must cover the minimum capital requirements. This corresponds to the amount of the eligible basic own funds, below which policyholders and beneficiaries may be exposed to a high level of risk.
The minimum capital requirement shall have an absolute floor of €2.2 million for non-life assurance, €3.2 million for life assurance and reinsurance undertakings.
If the value of technical provisions do not correspond to the amount insurance and reinsurance undertakings would have to pay, if they were to transfer their obligations immediately to another undertaking, the supervisory authorities may prohibit the free disposal of assets.
If the capital requirements for an undertaking are no longer complied with, it must inform the supervisory authority. It must submit a recovery plan, once the noncompliance of the solvency capital has been recorded.
There are specific provisions in relation to the accounts of the insurance company. A precise layout is prescribed. Certain notes must be provided for.
The Solvency II Directive requires insurance companies to hold enough financial resources. It also sets out management and supervisory rules. The directive covers non-life insurance, life insurance and reinsurance companies.
Insurance companies have to hold capital in relation to their risk profiles to guarantee that they have sufficient financial resources to withstand financial difficulties. They have to comply with capital requirements:
- the minimum capital requirement (MCR): the minimum level of capital below which policyholders would be exposed to a high level of risk;
- the solvency capital requirement (SCR): the capital that an insurance company needs in cases where significant losses have to be absorbed. The amount of capital is calculated by taking into account different risks such as:the market risk: the risk of loss or change of the financial situation resulting from markets fluctuations;the operational risk: the risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events.
If a company does not respect the two amounts of capital required, the supervisor has to take action.
Insurance companies have to put in place an adequate and transparent governance system with a clear allocation of responsibilities. They must have the administrative capacity to deal with different issues including risk management, compliance with the legislation, and internal audit.
Insurance companies have to conduct their own risk and solvency assessment (ORSA) on a regular basis. This involves assessing the risk solvency needs in relation to their risk profiles, as well as their compliance with the financial resources required.
The legislation sets out a ‘Supervisory Review Process’ (SRP) that enables supervisors to review and evaluate insurance companies’ compliance with the rules. The aim is to help supervisors to identify companies that may enter difficulties. Insurance companies also have to disclose information publicly.
The competent authority must conduct supervisory reviews ensuring compliance with the requirements. There is a requirement for reporting to the market, consumer and supervisory authorities
Additional capital requirements may be imposed following supervisory review where they depart to much from the assumptions of the solvency capital requirement.
The establishment of the EIOPA the EU’s regulatory authority for insurance has changed the supervisory regime. It has the function of encouraging cooperative competition within the sector exercising prudential oversight over and combating systematic risks within the market.
The omnibus directive sets out circumstances in which EIOPA may mediate in a dispute between home and how state regulators.
The EIOPA has significant rule-making powers including powers to propose binding technical standards technical regulatory standards for harmonisation of EU regulation and implementation technical standards. It can make binding recommendations to national supervisory authorities and take enforcement actions in certain circumstances.
There are provisions to ensure that insurance companies within groups may be properly supervised on an individual basis. The Member States must require participating insurance and reinsurance undertakings to ensure the eligible own funds are available in the group, which are always at least equal to the group solvency capital requirement.
States must provide the means of exercising control over groups. A single supervisor is to be designated from amongst the authorities of the states concerned. The risk supervisor is to be responsible for
- coordinating and gathering and dissemination of information,
- supervisory review and assessment of the financial situation of the group,
- assessment of compliance with the rules on solvency and on risk concentration and intergroup transaction;
- assessing the governance of the group.
Each insurance group – a company with entities providing services in one or more European countries – must have a group supervisor that has specific responsibilities in close cooperation with the national supervisors involved.
There is a directive dealing with the taking up and provision of reinsurance businesses, whether life insurance or non-life insurance. Reinsurance activities must limit their activities to reinsurance and related business
- submit a scheme of operations
- posses a minimum guarantee fund
- be run by qualified persons of good repute
There are provisions in relation to financial supervision and solvency technical provisions. These are the responsibility of the home state. There are provisions for the establishment of technical provisions, equalisation reserves and the investment of assets covering the provisions.
There are specific rules in relation to the reorganisation and winding up of insurance businesses. The principle is that the winding up should take place in a single insolvency procedure initiated in the home state. They are then governed by a single insolvency law.
The authorities of the home state are empowered to make the decision on winding up. These must be recognised across the EU. Supervisory states of other countries must be informed of the opening of winding up proceedings as a matter of urgency. There must be appropriate publicity. The creditors must be individually informed and updated of proceedings.