Solvency II: Restructuring the Insurance Sector (Part 3)

In part 3 of our series on Solvency II, we will try to understand Title I of the Solvency Act in some depth.

Title I: General Rules On The Taking-Up And Pursuit Of Direct Insurance And Reinsurance Activities

The key objectives of this title are:

1. The taking-up and pursuit, within the community, of the self-employed activities of direct insurance and reinsurance
2. The supervision of insurance and reinsurance groups
3. The reorganisation and winding-up of direct insurance undertakings

This title covers the Calculation of Solvency Capital Requirements.

The Solvency Capital Requirement will be calculated on the presumption that the undertaking will pursue its business as a going concern. The Solvency Capital Requirement will be calibrated so as to ensure that all quantifiable risks to which an insurance or reinsurance undertaking is exposed are taken into account. It will cover existing business, as well as the new business expected to be written over the following 12 months. With respect to existing business, it shall cover only unexpected losses.

It will correspond to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 99.5 % over a one-year period.

The Solvency Capital Requirement shall cover at least the following risks:

1. Non-life underwriting risk
2. Life underwriting risk
3. Health underwriting risk
4. Market risk
5. Credit risk
6. Operational risk

Operational risk includes legal risks, and exclude risks arising from strategic decisions, as well as reputation risks. When calculating the Solvency Capital Requirement, insurance and reinsurance undertakings shall take account of the effect of risk-mitigation techniques, provided that credit risk and other risks arising from the use of such techniques are properly reflected in the Solvency Capital Requirement. Insurance and reinsurance undertakings shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the supervisory authorities.

The calculation of the Minimum Capital Requirement shall be calculated in accordance with the following principles:

• To be calculated in a clear and simple manner, and in such a way as to ensure that the calculation can be audited;
• To correspond to an amount of eligible basic own funds below which policy holders and beneficiaries are exposed to an unacceptable level of risk were insurance and reinsurance undertakings allowed to continue their operations;
• The Minimum Capital Requirement shall be calibrated to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 85% over a one-year period;

The Minimum Capital Adequacy requirement will have an absolute floor of:

1. EUR 2 200 000 for non-life insurance undertakings, including captive insurance undertakings (With the exception in some cases where it will be  no less than EUR 3 200 000)
2. EUR 3 200 000 for life insurance undertakings, including captive insurance undertakings,
3. EUR 3 200 000 for reinsurance undertakings, except in the case of captive reinsurance undertakings, in which case the Minimum Capital Requirement shall be no less than EUR 1 000 000,

The Minimum Capital Requirement shall neither fall below 25 % nor exceed 45 %.

Non-Compliance with the Solvency Capital Requirement

1. Insurance and reinsurance undertakings shall immediately inform the supervisory authority as soon as they observe that the Solvency Capital Requirement is no longer complied with, or where there is a risk of non-compliance in the following three months.
2. Within two months from the observation of non-compliance with the Solvency Capital Requirement the insurance or reinsurance undertaking concerned shall submit a realistic recovery plan for approval by the supervisory authority.
3. The supervisory authority shall require the insurance or reinsurance undertaking concerned to take the necessary measures to achieve, within six months from the observation of non-compliance with the Solvency Capital Requirement, the re-establishment of the level of eligible own funds covering the Solvency Capital Requirement or the reduction of its risk profile to ensure compliance with the Solvency Capital Requirement. The supervisory authority may, if appropriate, extend that period by three months.
4. In the event of an exceptional fall in financial markets, the supervisory authority may extend the period set out in the second subparagraph of paragraph 3 by an appropriate period of time taking into account all relevant factors.

The insurance or reinsurance undertaking concerned shall, every three months, submit a progress report to its supervisory authority setting out the measures taken and the progress made to re-establish the level of eligible own funds covering the Solvency Capital Requirement or to reduce the risk profile to ensure compliance with the Solvency Capital Requirement.

Non-Compliance with the Minimum Capital Requirement

1. Insurance and reinsurance undertakings shall inform the supervisory authority immediately where they observe that the Minimum Capital Requirement is no longer complied with or where there is a risk of non-compliance in the following three months.
2. Within one month from the observation of non-compliance with the Minimum Capital Requirement, the insurance or reinsurance undertaking concerned shall submit, for approval by the supervisory authority, a short-term realistic finance scheme to restore, within three months of that observation, the eligible basic own funds, at least to the level of the Minimum Capital Requirement or to reduce its risk profile to ensure compliance with the Minimum Capital Requirement.
3. The supervisory authority of the home Member State may also restrict or prohibit the free disposal of the assets of the insurance or reinsurance undertaking. It shall inform the supervisory authorities of the host Member States accordingly. At the request of the supervisory authority of the home Member State, those authorities shall, take the same measures. The supervisory authority of the home Member State shall designate the assets to be covered by such measures.

Withdrawal of Authorisation

The supervisory authority of an European Union member may withdraw an authorisation granted to an insurance or reinsurance undertaking in the following cases:

1. The undertaking concerned does not make use of the authorisation within 12 months, expressly renounces it or ceases to pursue business for more than six months, unless the Member State concerned has made provision for authorisation to lapse in such cases
2. The undertaking concerned no longer fulfills the conditions for authorisation
3. The undertaking concerned fails seriously in its obligations under the regulations to which it is subject.

The supervisory authority of the home Member State shall withdraw an authorisation granted to an insurance or reinsurance undertaking in the event that the undertaking does not comply with the Minimum Capital Requirement and the supervisory authority considers that the finance scheme submitted is manifestly inadequate or the undertaking concerned fails to comply with the approved scheme within three months from the observation of non-compliance with the Minimum Capital Requirement.

In the event of the withdrawal or lapse of authorisation, the supervisory authority of the home Member State shall notify the supervisory authorities of the other Member States accordingly, and those authorities shall take appropriate measures to prevent the insurance or reinsurance undertaking from commencing new operations within their territories.

The supervisory authority of the home Member State shall, together with those authorities, take all measures necessary to safeguard the interests of insured persons and, in particular, shall restrict the free disposal of the assets of the insurance.