MEPs give green light to Solvency II

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Members of the Parliament’s Economic Affairs Committee yesterday (7 October) reached agreement on draft rules aimed at overhauling the EU insurance landscape. The current financial crisis has underlined the importance of reforming the sector, but finance ministers remain strongly divided over the issue.

22 MEPs voted in favour of the text, with seven against and four abstentions. The most significant of the over 800 amendments tabled related to the issues of group supervision and capital requirements. 

Stronger group supervision 

MEPs specifically asked for the mandatory creation of supervisory colleges, gathering all the various national supervisors responsible for each financial group and its subsidiaries. This, they say, will facilitate cooperation, exchange of information and consultation between supervisors. 

They also introduced changes to the arrangements for handling disagreements between group and subsidiary supervisors in different member states. 

Stressing the importance of a subsidiary’s risk profile when calculating a group’s capital requirements, MEPs said it was important to give the European supervisory authority CEIOPS (Committee of European Insurance and Occupational Pension) a mediatory role among group and subsidiary supervisors. 

The committee should be authorised to make rulings in disputes and to force group supervisors to “comply or explain”, they stressed. 

But the issue of cross-border supervision is hotly disputed by a number of countries, which fear it will lead to a loss of power for national authorities. What is more, Eastern European countries, most of which do not have a big insurance industry, fear that the reform of the insurance sector focuses too much on big multinationals’ interests. 

While they accept that the principles of group supervision and geographic diversification should be applied even to their smaller mutual insurance companies, they say they should also be allowed to maintain a different status. 

In substance, they believe the opportunity to spread risk among subsidiaries should also be given to mutuals, even if these do not actually have any subsidiaries, only relationships with equal partners. 

Clearer capital requirements 

MEPs also decided to amend criteria on the amount of capital that insurance companies should hold. According to them, the Minimum Capital Requirement (MCR), which defines the point at which a company’s lincence would be withdrawn, should be set at between 25-45% of a company’s Solvency Capital Requirement (SCR), rather than between 20-50% as suggested by the Commission. 

Governments under pressure 

As the current financial crisis picks up pace and the fall in equity prices impacts upon insurers, the Commission is pushing for a quick deal on what is already on the table, arguing that “if we fail, we will not have a second chance for a long time”. 

The French Presidency still hopes for a deal with Parliament by the end of the year. For this to happen, member-state finance ministers must reach an agreement at their next meeting on 4 November, which seems unlikely given the large disagreement on the issue of group supervision. 

UK Socialist MEP  and rapporteur on Solvency II Peter Skinner called the agreement "a giant step forward". "Now we have something we can present" to member states, he said, calling on government to come forward with a common position at their next meeting in November so the directive can still be adopted by the end of the year. 

German shadow rapporteur for Solvency II in the EPP-ED group, Karsten Friedrich Hoppenstedt, said he welcomed the committee vote, which would provide for "more practical and better handling" and a "better balance between the different positions". 

But Lithuanian Liberal Margarita Starkevicute voted against the text, saying it was not sufficiently up-to-date anymore to cope with the current financial turmoil. "The fact that big insurance groups still try to push this directive forward shows that they do not understand that their operational model is not sustainable and they have to update it unless they want to face serious financial problems." 

The CEA, the European insurance and reinsurance federation, expressed satisfaction with the committee text, particularly welcoming MEPs' decisions on group support and the minimum capital requirement, said CEA Director General Michaela Koller

In July 2007, the European Commission proposed a general revision of 30-year old rules governing European insurers' financial positions. The initiative was labelled Solvency II in reference to the current regulatory framework Solvency. 

Solvency II proposes a new risk-based approach as an alternative to the existing "flat rate" system. According to this new methodology, the higher the economic risk an insurer takes, the more capital the company would have to hold as a guarantee against default. 

The proposal also aims to reform supervision procedures, with the intention of increasing cooperation among national supervisors, especially for multinational companies. It requests more transparency from insurer and reinsurer groups. 

  • 4 Nov. 2008: ECOFIN Council likely to discuss the Solvency II proposals again.
  • 18 Nov. 2008: Plenary to vote in 1st reading. 

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