The Commission unveiled its proposed Solvency II directive on 10 July, introducing a major reform of the supervisory framework for the insurance and reinsurance industries. The proposal was welcomed by large industry players who see it as an opportunity to expand their activities in other European states.
The new Directive proposed by the Commission eyes wide-ranging reforms for insurers and re-insurers. The new rules are set to improve the protection of policyholders and beneficiaries, as well as further to integrate and boost competitiveness of the European insurance market. The Commission expects that mass products in particular, such as motor and household insurances, will become cheaper.
- Economic risk-based solvency requirements
Solvency rules prescribe the minimum of financial resources that insurers and re-insurers must hold in order to cover the risks to which they are liable and withstand adverse events, such as natural catastrophes or serious car accidents. The new system constitutes a move away from a “flat rate” system to a “risk-based approach”. Therefore, the minimum financial resource requirement will depend on the level of risk taken on by insurers.
The 20 largest insurance groups account for more than 50% of the market. They usually have more diversified risks, as they operate different types of insurance as well as across borders. Therefore, major players, such as Allianz, Axa, Aviva and Swiss Re, are most likely to reap the benefits of the new calculation for the capital requirements and free up surplus capital.
Moreover, the new calculus also takes into account the risk level of insurers’ investments undertaken, as well as credit and operational risk, which affect insurers’ solvency.
The new system also includes an “early-warning mechanism”, in which supervisors will take action when an insurer’s resources hit a certain threshold, but before they fall under the minimum capital requirement, when an insurer’s liabilities are transferred and the business closed. The new regime seeks to avoid scandals such as the recent Equitable Life case (EURACTIV 19/06/07).
- New supervisory system
Solvency II foresees extending the role of supervisory authorities to not only calculate the appropriate capital requirement level for insurances, but also assess their quality of risk management.
Another important innovation is the strengthening of the role of the group supervisor, with the insurer’s home-country supervisor taking a lead, with whom the group supervisor, however, will also work in close co-operation.
- Increased transparency
The new Directive will set out standards for the disclosure of information, which will be available to policyholders and investors and public authorities.