A major overhaul of the supervisory framework to enhance the financial stability of the insurance industry was approved on Wednesday by the European Parliament in Strasbourg. MEPs voted 593 votes in favour, 80 against with 3 abstentions on the so-called Solvency II legalisation.
According to rapporteur Peter Skinner (PES, UK)
The aim of the approved legislation, called Solvency II, is to help ensure the financial stability of insurance (and reinsurance) companies by introducing more sophisticated solvency requirements which will take better account of the risks the companies must deal with: insurance risks as at present, but also market, credit and operational risks.
Parliament's main achievements
The European Parliament and the Council of Ministers have already reached an agreement on a common text. This means the legislative procedure ends with Parliament vote and a consequent formal go-ahead by the Council.
The European Parliament representatives, during the lengthy negotiations with the Council of Ministers, were able to substantially improve the proposed legislation. Particularly, they made their voice heard on issues such as the capital requirements, group supervision and the review clause to update the legislation.
New supervisory approach
The new legislation shifts the focus of supervisory authorities from merely checking compliance with a "tick-the-box" approach based on a set of rules to more pro-actively supervising the risk management of individual companies based on a set of principles.
Group supervision: cost reduction for companies
To improve supervision and risk management, Parliament sought and obtained the creation of supervisory colleges – made up of the various national supervisors responsible for a group and its subsidiaries – to facilitate cooperation, exchange of information and consultation between the supervisors.
The new supervisory system would also mean economic gains for company. EU companies would no longer need to deal with several national regulators, but just with one group.
Capital Requirements: new transparent criteria
The legislation introduces a new relationship between two key criteria for the amounts of capital insurance companies should hold – the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR).
The SCR will be calculated according to a risk-based approach: when capital falls below this level, supervisory intervention will be needed.
The MCR is lower – the point at which the company’s license would need to be withdrawn.
As well as setting absolute minimum levels for the MCR for different types of company, the new legislation indicates that the MCR should be between 25 and 45 per cent of the company’s SCR, with the exact amount being a calculation based on variables which indicate the company’s ability to remain operational.
Entry into force and review clause
Member States will have to transpose the new directive by at the latest 31 October 2012.
Two years after entry into force, the Commission is requested to put forward a legislative proposal to improve, if necessary, the application some aspects of the Directive, including the cooperation of supervisory authorities within the colleges.
Three years after entry into force, Commission will have to propose legislation to enhance group supervision and capital management within a group of insurance. This would also include the provision, proposed by Parliament representatives, on group support, (i.e. that part of the capital requirement for a subsidiary could be met by a guarantee that funds would be transferred from the group if needed).
