Solvency II Directive

European Commission Publishes Report on Group Supervision Provisions Under Solvency II Directive

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On June 27, the European Commission published a report (COM(2019) 292 final) on the group supervision and capital management provisions under the Solvency II Directive (2009/138/EC).

In the report, addressed to the European Parliament and the Council of the EU, the Commission assesses the benefit of enhancing the Solvency II Directive provisions on group supervision and capital management within a group.

The Commission considers that some areas of the prudential group supervision framework may not ensure harmonized implementation of the rules by groups and national supervisors. This has the potential to have an impact on both the level playing field and capital management strategies.

The Commission has identified some legal uncertainties and diverging supervisory practices that can have a significant impact on group solvency. They concern group own funds, the group solvency capital requirement (SCR) and the group minimum capital requirement (MCR). The use of group internal models may raise additional issues. The Commission has also found a wide variety of interpretations of the group governance provisions.

The Commission has found that diverging implementation of the group supervision provisions may be detrimental to policyholder protection, depending on how national supervisors determine the scope of supervision, and exercise supervision at the level of parent holding companies. In addition, in light of the wide differences between the supervisory powers of different national supervisors, the Commission believes it is necessary to assess the appropriateness of the early intervention powers embedded in the Solvency II regime.

The Commission recognizes that it has identified a number of important issues that may need to be addressed, possibly including by way of legislative changes. However, further analysis is needed on the impact of the potential changes on the existing requirements. Therefore, the Commission deems it appropriate to include group supervision in the scope of its 2020 general review of the Solvency II Directive. As part of the 2020 review, the Commission has invited the European Insurance and Occupational Pensions Authority (EIOPA) to provide technical advice on the issues identified in the report, as well as other related issues that may be detrimental to policyholder protection.

Implementing Regulation on Information for Calculation of Technical Provisions and Basic Own Funds for Q4 2016 Reporting Under Solvency II Adopted by European Parliament

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On November 11, 2016, the European Commission adopted an Implementing Regulation laying down information for the calculation of technical provisions and basic own funds for reporting with reference dates from September 30 until December 30, 2016, in accordance with the Solvency II Directive (2009/138/EC).

EIOPA provided the Commission with the technical information related to end of September 2016 market data on October 11, 2016, which was published in accordance with Article 77E(1) of Solvency II.

The aim is that by setting out technical information on relevant risk-free interest rate term structures, fundamental spreads for the calculation of the matching adjustment and volatility adjustments for every reference date, conditions for the calculation of technical provisions and basic own funds will be uniform across all insurance and reinsurance undertakings for the purposes of Solvency II.

The annexes to the Implementing Regulation set out the technical information to be used by reinsurance and insurance undertakings for the reference dates from September 30 to December 30, 2016, are as follows:

  • Annex I: the relevant risk-free rate term structures.
  • Annex II: the fundamental spreads for the calculation of the matching adjustment.
  • Annex III: the volatility adjustments for each relevant national market.

EIOPA Publishes Final Report on Identification and Calibration of Infrastructure Corporates under Solvency II

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On June 30, 2016, The European Insurance and Occupational Pensions Authority (“EIOPA”) published a final report providing technical advice to the European Commission on the identification and calibration of other infrastructure investment risk categories (that is, infrastructure corporates) under the Solvency II Directive.  An infrastructure corporate is an entity or corporate group that carries out infrastructure activities (such as energy generation, social housing, healthcare or hospitals).

On October 14, 2015, EIOPA received a request from the European Commission for further technical advice on the issue of infrastructure corporates. In response, in November 2015, EIOPA published a call for evidence on the treatment of infrastructure corporates.  The final report follows EIOPA’s April 2016 consultation on the issues.

In the report, EIOPA recommends that the asset class is extended in two ways:

  1. To allow certain infrastructure corporates to qualify for the treatment for infrastructure projects provided that there is an equivalent level of risk.
  2. To create a separate differentiated treatment for equity investments in high-quality infrastructure corporates.

For those corporates that have a lower risk profile, EIOPA proposes reduction in the risk charges for equity investments.

EIOPA also recommends that insurers are required to conduct adequate due diligence, establish written procedures to monitor the performance of their exposures and perform stress testing on the cash flows and collateral values supporting their investment.

PRA Issues Clarification on Implementation of the Solvency II Directive

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On August 29, the UK PRA issued an update on the implementation of the Solvency II Directive (2009/138/EC), which is planned for January 1, 2016. The current PRA Update focuses on:

  • the relationship between the risk margin and the calibration of non-hedgeable risks; and
  • the assessment of the credit risk for matching adjustment portfolios.  PRA Update.

FSA Letter on Monitoring Ongoing Appropriateness of Solvency II Internal Models

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On 18 June 2012 the FSA published a letter (dated 13 June 2012) from Julian Adams, FSA Director of Insurance, to firms involved in the FSA’s internal model approval process (IMAP) in preparation for the implementation of the Solvency II Directive. Letter.

The letter sets out the FSA’s thinking on how it will monitor the ongoing appropriateness of internal models after approval. Highlights include:

• The FSA expects firms to have systems and controls in place to ensure that the internal model operates properly on a continuous basis at all times, including stressed market conditions.

• The FSA is developing a number of early warning indicators (which may take the form of ratios or ranges) to help it and firms ensure that, after approval, internal models and the solvency capital requirement (SCR) calculation remain appropriate.

Directive Amending Solvency II Transposition and Application Dates Published

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On 21 May 2012, the European Commission published a legislative proposal for a directive to amend the Solvency II Directive. The proposals extend the date by which Solvency II must be transposed by member states into national law from 31 October 2012 to 30 June 2013. It also states that Solvency II will apply from 1 January 2014 (the application date) and Solvency I will no longer apply on this date.

The proposals were made as a result of delays in the adoption of the Omnibus II Directive and to allow a smooth transition into the new law under Solvency II. The Commission has requested that the European Parliament and Council of the European Union adopt the proposed Directive urgently so that it can enter into force as soon as possible. Legislative Proposal.