Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive on the supplementary supervision of insurance undertakings in an insurance group` ()

(96/C 174/05)

The Council decided on 15 November 1995, in accordance with Article 198 of the EU Treaty, to ask the Economic and Social Committee for an Opinion on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for the preparatory work, adopted its Opinion on 8 March 1996. The Rapporteur was Mr Pelletier.

At its 334th Plenary Session of 26 and 27 March 1996 (meeting of 27 March 1996), the Economic and Social Committee adopted the following Opinion by 96 votes to 2, with 3 abstentions.

SUMMARY

The aim of the proposal before the ESC is to enable the competent supervisory authorities in the Member States, on a harmonised basis, to exercise prudential supervision on 'pure` insurance groups, as a complement to the individual supervision to which each insurance firm would still be subject.

The proposed supervisory arrangements would include the following: improved exchanges of information (Articles 5 and 6), rules governing intra-group transactions (Article 8), prevention of 'double gearing` of capital by calculating adjusted solvency using one of the three methods recognised as prudentially equivalent and, in the event of adjusted solvency being negative, the automatic imposition of sanctions (Article 9). Reinsurance holdings would be included within the scope of adjusted solvency checks. Insurance holding companies would have to undergo a capital leveraging warning test, which may lead to insurance firms attached to the holding company being subjected to sanctions imposed at the discretion of the supervisory authorities (Article 10). The perimeter of an insurance group subject to all these rules would include all holdings of 20 % or more of the voting rights or capital or a firm (Article 1), subject to a temporary exemption (Article 11).

After examining the proposal attentively, the ESC has issued a favourable Opinion, subject to the following reservations:

- the definition of participation should correspond to economic reality;

- insurance holding companies should not be subject to such strict checks for detecting the creation of fictitious capital;

- the treatment of reinsurance holdings should be left up to the Member States;

- as regards adjusted solvency checks, all the elements of own funds and the elements for valuing the assets of subsidiaries allowed at 'solo` supervision level should be recognised;

- the cost of additional supervision should be proportional to any prudential risks sustained, and not jeopardise the competitiveness of the European insurance industry.

The amendments proposed in the fourth part of the Opinion are based on the desire to reduce the difficulties with which the European insurance industry would certainly be faced if the points raised were not clarified.

1. Introduction

1.1. The basic aim of checking the solvency of insurance companies is to ensure that policyholders and third parties are protected.

1.2. With the third generation Directives 92/49/EEC of 18 June 1992 and 92/96/EEC of 10 November 1992, the prudential rules imposed on insurance firms as regards the calculation of actuarial reserves, their inclusion on the assets side as investments and solvency ratios have been harmonized at Community level. Supervision is now carried out exclusively by the competent authorities in a firm's country of origin, both when licenses are issued and as regards all the other periods of the firm's activity, including when it is in difficulties. All the rules which are based on a mutual recognition of licenses and systems of prudential control concern only the supervision of individual firms, known as 'solo` supervision.

1.3. When an insurance firm's solvency is assessed, no account is taken of the firm's membership of an insurance group or of any influence - whether positive or negative - which other members of the group may have on its financial situation.

1.4. After analysing a number of actual cases submitted by the supervisory authorities the Commission considers that adequate prudential measures are necessary at Community level in order to evaluate the risks of an insurance firm which belongs to a group where insurance firms predominate without jeopardising what has been achieved by the Third Directives. As the legal basis for its proposal the Commission suggests Article 57(2) of the EEC Treaty, which is found in similar texts (credit institutions).

1.5. The Commission therefore wishes, while respecting the principle of subsidiarity, that the supervisory authorities be equipped with tools, based on harmonized minimum criteria, for assessing the additional prudential risks which might appear within a purely insurance group.

1.6. Any new requirement seeking to reflect the influence which a group of companies may have on an insurance firm will be an addition to, and not a replacement of, solo checks on solvency.

2. Historical background

2.1. The First Insurance Directives (73/239/EEC for Non-Life and 79/267/EEC for Life Assurance) made it compulsory for insurance firms to have a solvency margin. They also made the granting of a licence dependent on the identity of the shareholders or partners.

The Third Directives (92/49/EEC for Non-Life and 92/96/EEC for Life Assurance) recognized for the first time the need to extend the scope of insurance firm supervision: they took account of the existence of subsidiaries when applying rules on the diversification of assets representing technical provisions.

2.2. In the field of banking, Directive 92/30/EEC organized the supervision of credit institutions on a consolidated basis.

2.3. Right from the start of the initial discussions within the Insurance Committee on the prudential supervision of financial conglomerates consisting of banks and insurance companies, the need emerged for a solution to the problems peculiar to 'pure` insurance groups, particularly the risks of double gearing, which are very different from those facing a banking group. The need for the Commission to prepare a harmonized legal framework for supervising firms belonging to an insurance group then became apparent.

2.4. The Insurance Committee which groups together the Member States' supervisory authorities, was involved in the Commission's work on the supervisory rules which should apply. It considered at great length the prudential effects of the methods recommended by the various supervisory authorities in the EU for preventing double gearing (1: deduction and aggregation method in the UK, the Netherlands, Germany and Ireland; 2: requirement deduction method in Denmark; 3: accounting consolidation-based method in France and Spain). The calculations which it carried out revealed that these methods gave sufficiently comparable results for them to be considered as equivalent, each method appearing in turn, depending on the circumstances, harder or softer on firms than the two others.

2.4.1. When preparing the present proposal, the Commission consulted on several occasions the bodies representing the insurance profession at European level (European Insurance Committee, International Association of Mutual Insurance Companies and the European Co-operative and Mutual Insurers Association).

2.4.2. The European Insurance Committee was concerned about the additional constraints in terms of higher capital costs which would inevitably have an impact on the rates offered to customers. It was also worried about the complexity of the language in the texts submitted to it, which could be a source of confusion or distortions of competition. It constantly expressed support for the same regulatory principles applying to additional solvency supervision as for 'solo` supervision.

2.4.3. The International Association of Mutual Insurance Companies (AISAM) and the European Co-operative and Mutual Insurers Association (ACME) have expressed their specific concerns about the interpretation of this text and its application to mutual groups. The ACME is worried at the risk of competition being distorted between: (a) groups of insurance firms which are not linked together by capital, and (b) other insurance groups.

2.5. Several Member States (Denmark, Spain, France, the Netherlands, the United Kingdom) have already included insurance group supervision measures in their national laws.

3. General comments

The ESC supports the proposed directive, subject to the following reservations:

- the method used for determining the participations, whatever their legal form, to be included within the field of adjusted solvency requirements should take account of economic realities;

- insurance holding companies which are not subject to any individual solvency check should be excluded from the check for detecting the creation of fictitious capital or, at the very least, taken into account on much easier terms, although certain representatives feel that even the partial exclusion of reinsurance holdings and participations would amount to creating a distortion of competition with regard to groups of insurance firms which are not linked together by capital;

- the treatment of reinsurance firms' participations as regards adjusted solvency requirements should be left to the Member States;

- the elements of own funds and the elements for valuing the assets of subsidiaries allowed at 'solo` supervision level should be recognised at adjusted solvency check level;

- the cost of additional supervision should be proportional to any prudential risks sustained through membership of an insurance group, so as to maintain the competitiveness worldwide of the European insurance industry, whatever its legal form, and avoid distortions of competition being created within the Community.

The ESC notes that, because the wording of the proposed directive is often obscure, it is all the more necessary to allow the Member States the freedom to adopt implementation procedures which are best adapted to their own market, while respecting the rules laid down in the Treaty.

3.1. The supplementary supervision of insurance undertakings in an insurance group which the Commission proposes to introduce concerns only 'pure` insurance groups, and not other financial groups.

3.1.1. There is therefore apparently no problem of an overlap with Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis, which covers in particular all cases where a financial company or a mixed-activity company has subsidiaries which are mainly or exclusively credit or financial institutions.

3.1.2. However, the ESC thinks that prudential supervision of insurance groups should not have to obey the same principles as those applying to banking groups, nor should it set a precedent for establishing ad hoc prudential rules for the possible supervision of financial conglomerates.

3.2. The present proposal for a directive is founded on three main principles:

3.2.1. Improved exchanges of information (Articles 5 and 6)

3.2.1.1. All entities belonging to an insurance group must set up adequate internal procedures for guaranteeing the availability and quality of the information necessary for the supervisory authorities. Such an obligation had already been imposed by the Third Life and Non-Life Insurance Directives in Articles 8 and 9 for insurance firms.

3.2.1.2. Access to information will be made easier: the supervisory authorities will have the right of follow-up and on-the-spot verification in collaboration, if necessary, with the competent authorities of the Member State where the entity is situated.

3.2.2. Rules for intra-group transactions (Article 8)

'Major` transactions between the different entities of an insurance group must in principle be concluded on market terms and be the subject of an annual declaration after the event to the competent authorities. The following types of transactions are among those mentioned: loans, guarantees and other off-balance sheet transactions, investments and elements eligible for the solvency margin, and also reinsurance transactions.

3.2.3. New rules to prevent double gearing (Articles 9 and 10, Annexes I and II)

3.2.3.1. First of all, to prevent the same capital being used more than once in covering the required regulatory capital for insurance undertakings in the same group, an adjusted solvency requirement is to be imposed on insurance groups (Article 9).

3.2.3.1.1. This will be in addition to existing requirements for each insurance entity, and not a replacement for them. It is commonly known as 'solo plus supervision`.

3.2.3.1.2. The calculation of the adjusted solvency margin rules out any intra-group creation of capital (e.g. a subsidiary possessing a holding in the parent company or granting it a subordinated loan). The adjusted solvency situation is then calculated using one of the three methods described in Annex I and considered by the supervisory authorities as equivalent in prudential terms.

3.2.3.1.3. The first two methods (1: deduction and aggregation method and 2: the requirement deduction method) calculate the solvency of insurance companies at each level of the group without consolidating the financial situation of the insurance group (the 'bottom up` principle). The third method (accounting consolidation-based method) contains the possibility of exercising supervision at the head of the group.

3.2.3.2. The deduction and aggregation method consists of measuring the difference between:

- the sum of the elements eligible for the solvency margin of the supervised firm and the proportional share of that firm in the solvency margin of the firm related to it; and

- the sum of the book value of the elements eligible for the solvency margin of the related firm and the solvency requirement of the supervised firm and the proportional share of the solvency requirement of the related undertaking.

3.2.3.2.1. In other words, the regulatory capital requirement has to be deducted from the regulatory capital of the supervised firm, bearing in mind the firms related to it.

3.2.3.3. The requirement deduction method is very rarely recommended. It differs from the deduction and aggregation method in that only the related firm's solvency requirement is taken into account when doing the calculations.

3.2.3.3.1. This amounts to saying that the regulatory capital of the supervised firm must be equal to or higher than the sum of the solvency requirements of the whole (supervised firm and related firms).

3.2.3.4. The accounting consolidation-based method is applied in Spain and France, using different procedures, and consists of calculating the sum of the individual margin requirements of the entities within the group and deducting from it the sum of the group's own capital. The principles on which it is founded enable double gearing to be eliminated by the accounting consolidation process, which automatically cancels out intra-group holdings.

3.2.3.4.1. The ESC feels that it does not have the means to assess whether the methods are truly equivalent and will be applied by the supervisory authorities under equivalent conditions. It stresses that this problem is absolutely vital and should be given particular attention.

3.2.3.5. Insurance holding companies are treated differently from insurance undertakings. Article 10 provides for a capital leveraging warning test. Strictly speaking, this is not an adjusted solvency test, but a means of assessing whether a holding company's debts are being used to finance its subsidiaries and are likely to create excessive tensions within the insurance group. The methods of calculation described in Annex II (solvency warning test and accounting consolidation test) are less strict than those used to prevent double gearing in insurance firms, and the sanctions do not seem to have the same scope: under Article 9, measures must be taken as soon as the adjusted solvency has become negative, whereas under Article 10, any measures to be taken are left to the discretion of the supervisory authorities; there is no pre-defined quantitative limit, nor do any sanctions have to be applied automatically.

3.3. Perimeter of a group

3.3.1. The present version of the proposal for a directive defines the perimeter of the entities in an insurance group which should be the subject of extra supervision.

3.3.1.1. The proposed definitions for parent companies, subsidiaries and participations are borrowed from Directive 92/30/EEC on the supervision of credit institutions on a consolidated basis and the Seventh Directive 83/349/EEC on consolidated accounts.

A 'participation` is therefore defined solely in quantitative terms: i.e. the fact of holding at least 20 % of the capital or voting rights.

3.3.1.2. However, Article 11 of the proposal allows the participation threshold to be raised from 20 to 25 % as an exception for a period of four years expiring on 1 July 2001. This exception may apply to all the obligations imposed by the directive, whether it be the production of information, intra-group transactions or the adjusted solvency requirement.

3.3.1.3. The problem of the group perimeter, or rather the threshold above which additional supervision would apply, does not arise in quite the same terms as it does in the case of credit institutions.

3.3.1.3.1. On the basis of the small number of company failures, it can be observed that the risks of contagion within an insurance group are less acute or extensive than in other financial sectors; this is due mainly to the principle of specialisation in insurance activities, the capacity to transfer portfolios rapidly, and the existence of prudential rules which apply to each insurance firm.

3.3.1.3.2. Three prime issues must therefore be raised:

- the respective roles of the firm and the supervisory authority in determining the group's perimeter;

- the special ease of partnerships; and

- the fixing of the participation threshold.

3.3.1.4. As regards the respective roles of the firm and the supervisory authority in determining the group's perimeter, the ESC would emphasise that, in practice, it is up to the insurance firm to decide which entities are to be submitted for supplementary supervision bearing in mind the provisions of the present directive and on the basis, more often than not, of the account consolidation perimeter as certified by the auditors, with the supervisory authority retaining the possibility of contesting the firm's choice and of showing that certain participations must be reclassified. Moreover, the ESC considers it necessary that the uniformity of European law should be guaranteed.

3.3.1.5. As regards groups of insurance firms which are not linked together exclusively by capital (mutuals, providence institutions, etc.) and which are included in the scope of the proposal, the ESC wonders whether the definitions in Article 1 are suited to the non-capital based organisational structure of such groups, especially as their status varies considerably from one Member State to another.

The ESC would like this point to be clarified, on the basis of Community-level acquired rights (the 'acquis communautaire`).

3.3.1.6. As regards the fixing of the participation threshold, the ESC notes that the distinctions drawn by the proposal in Article 1(c), (d), (f) and (g) between a parent undertaking and a participating undertaking, and between a subsidiary and a related undertaking, may give rise to confusion.

3.3.1.6.1. The problem has already arisen in connection with the Seventh Council Directive 83/349/EEC of 13 June 1983, which drew a distinction between cases where a controlling interest was based on a majority of voting rights, those where it was based on agreements, those where the effective exercising of control was noted on the basis of a minority holding, and finally those where a joint influence was exercised. The ESC therefore would like to see some clarification. A parent undertaking and a subsidiary should be defined within the meaning of the whole of Article 1 of the Seventh Directive 83/349/EEC on consolidated accounts, without there being any need to mention the idea of a dominant influence, which is already included in the said article. This was the solution adopted in the Third Life and Non-Life Directives, and which also enabled account to be taken of 'the effective exercising of control` and the idea of joint influence.

3.3.1.6.2. The definition of participation also poses a problem. A yardstick based purely on quantity - 'the ownership, direct or indirect, of 20 % or more of the voting rights or capital of an undertaking` - is not in keeping with economic realities in the insurance sector. The ESC feels that the definition of participation must correspond to the economic reality of the influence exerted by the investing firm, without any overlapping or confusion with the definitions of a parent undertaking and a subsidiary. This, of course, means that the exemption in Article 11 should be deleted.

3.3.1.6.3. It therefore proposes to qualify the quantity yardstick of 20 % of the voting rights or more of the firm's capital, which has a presumptive character, with qualitative elements such as a 'durable link` and a 'contribution to the activity of the participating undertaking`, terms which are used in Article 17 of the Fourth Directive 78/660/EEC of 25 July 1978.

3.3.1.6.4. Finally, the ESC would stress that this less rigid definition of participation must be carefully framed so as to avoid any distortions of competition.

3.4. The proposal lays down that supplementary supervision would apply to reinsurance undertakings and holding companies at the head of a group or in an intermediate position.

3.4.1. Applying the proposal's provisions to insurance holding companies and reinsurance undertakings merits careful scrutiny, especially as regards the check for detecting the creation of fictitious capital, since such firms are not generally subject to any individual supervision.

3.4.2. An examination should be carried out of the reality of the prudential risks inherent in the financial relations of these entities in relation to insurance firms in the same group, and in particular the possibilities of creating fictitious capital to be used for double gearing.

3.4.3. Holding companies

3.4.3.1. A holding company at the head of a group may benefit from external loans entering into its permanent capital without any risk arising for the rest of the insurance group other than that of making it subject to the constraint of financing such loans. A margin measured as inadequate at this level will, for this very reason, not have such serious consequences as double gearing in the strict sense of the term.

3.4.3.1.1. A holding company may also benefit from financing from within the group. The Commission considers that this is justification for a capital leveraging warning test, like that for external financing, in order to ensure better risk prevention within a group. But it seems that subsequent supervision of intra-group transactions and the specific provisions for preventing the creation of fictitious capital within a group, as mentioned in point 3.2.3.1.2 of this Opinion, are sufficient in themselves to enable the supervising authority to detect the creation of fictitious capital effectively, without there being any need for a capital leveraging warning test as well.

3.4.3.1.2. The case of intermediate holding companies is slightly different for reasons connected with the existence of three methods. This is because method 3 based on account consolidation conceals the intermediate holding company. Methods 1 and 2 do not. If access to holding companies' insurance subsidiaries is prevented because they are excluded from the proposal's scope, there may possibly be a threat of fictitious capital being created.

3.4.3.1.3. The problem must also be considered from the point of view of mutual groups headed by an insurance enterprise with partnership status; these would be subject only to the provisions of Article 9 for the adjusted solvency requirement, with the possible maximum sanction of losing their license if their margin was insufficient.

3.4.3.1.4. Bearing in mind these various factors, the ESC feels, under these circumstances, that the need to apply a capital leveraging warning test to holding companies has not been demonstrated; but the problem must also be considered from the point of view of the distortions of competition which could arise on such or such a market or between such or such a type of insurance enterprise (partnership, companies).

3.4.3.1.5. If it did not seem possible, in the end, to call into question the capital leveraging warning test on insurance holding companies, the ESC would feel that supervision should be relaxed and should not limit the capacity of such holding companies to finance their development on the capital markets through a wide range of means in the best interests of the insurance entities belonging to the group and of policyholders. Annex II should be clarified, and the scope of any sanctions which could be decided on by the supervisory authority should be specified.

3.4.3.1.6. Also, as regards method 3 (the accounting consolidation test), adjusted solvency supervision should stop at the highest insurance holding company, with no possibility of retracing obligations to the level of another, unlicensed firm.

3.4.3.1.7. Finally, the ESC is pleased that the proposal aims to treat insurance holding companies differently from mixed activity insurance holding companies. The former are subject to Article 10 and the capital leveraging warning test described in Annex II, while mixed activity holding companies are only subjected to partial supplementary supervision on the basis of Articles 5(2), 6 and 8 (access to information and reporting of intra-group transactions). However, it must be clear that the term 'ultimate parent of an insurance undertaking in a group` within the meaning of Annex II does not, under any circumstances, apply to mixed activity insurance holding companies.

3.4.4. Reinsurance undertakings

3.4.4.1. It should be pointed out that the risk created by not respecting the commercial obligations involved in a reinsurance contract is no different, whether the risk is within the same group or between a ceding and a reinsurance undertaking unconnected by any shareholding.

3.4.4.2. The ESC is sensitive to the exclusion argument, for reinsurance undertakings which are only subject to an individual solvency check in five Member States should be placed outside the scope of an adjusted solvency requirement.

3.4.4.3. The ESC has also seen that, by proposing to include reinsurance participations under adjusted solvency supervision, the Commission has wanted the supervisory authorities to have the means of ascertaining the risks to which a reinsurance subsidiary subjected its group, even though such risks could, in most cases, be listed under intra-group transactions, except in the case of a reinsurance subsidiary set up for the sole purpose of taking care of group acceptances.

3.4.4.4. The ESC therefore concludes that, in view of the variety of situations which exist, the best solution would be to leave it up to the Member States to decide how reinsurance undertakings' holdings should be treated as regards adjusted solvency requirements. But the Commission should be responsible for keeping an eye open for any distortions of competition which might result from adopting rules which have not been standardised (see point 4.3.2 below). The ESC also notes that the question of solo supervision of reinsurance undertakings is raised more and more often, and that attention will have to be paid to it when the time is ripe, since the text of this Directive is not the appropriate setting.

3.5. Recognition of own funds

3.5.1. Among its provisions designed to eliminate double gearing, the proposal imposes additional own funds requirements on insurance firms by excluding profit reserves and future profits of life assurance undertakings from the calculation of available own funds (see Annex I, paragraph 1B, last indent).

3.5.2. The problem is the following: because their commitments are of long duration, life assurance companies in the European Union exercise great caution when calculating the mathematical provisions for assuming their contractual obligations. The law obliges them to do so. So, their own funds are relatively low compared with those of non-life insurance firms. This is justified if profit reserves and future profits include elements which are not attributed to policyholders and which may be used to cover losses.

3.5.3. The ESC notes that the rules on solo supervision take account of this particular circumstance of life assurance companies by recognising undistributed profit reserves and, with the agreement of the supervisory authorities, future profits up to a certain amount as own funds when calculating solvency.

3.5.4. As the aim is to eliminate double gearing, a refusal to recognize solvency elements which do not result from intra-group transactions would go beyond the proposal's objective.

3.5.5. This remark also applies to the elements for assessing subsidiaries. When the latter are recognized on an individual basis by the competent EU authorities it is normal that they be recognized at group level, whatever the classification allocated to tangible and intangible assets on the balance sheet. Goodwill and acquisition costs which can be set off against future profits should be included when calculating the components of own funds.

4. Specific comments

The ESC notes first of all a number of cases of vague wording which might make it difficult to transpose the directive into national law and create legal uncertainties over its implementation.

4.1. Article 1

4.1.1. This article on definitions could have been usefully amplified by stating what is meant by the terms 'elements eligible for the solvency margin` and 'directly or indirectly related undertaking` which are already used in other Community directives. The ESC also wonders what is meant by the word 'mainly` in the definition of an insurance holding company in Article 1(h), and fears this will be interpreted in different ways by supervisory authorities.

4.1.2. In keeping with the ideas on the fixing of the participation threshold developed in points 3.3.1.6 et seq., the ESC suggests that the following definitions be adopted for a parent undertaking, a subsidiary, and participation:

'(c) "parent undertaking" means a parent undertaking within the meaning of Article 1 of Directive 83/349/EEC.

(d) "subsidiary" means a subsidiary undertaking within the meaning of Article 1 of Directive 83/349/EEC. All subsidiaries of subsidiary undertakings shall also be considered subsidiaries of the undertaking that is their original parent.

(e) "participation" means a participation within the meaning of Article 17 of Directive 78/660/EEC.`

4.2. Article 2

4.2.1. The proposed directive is to apply to insurance firms within the meaning of the Third Life and Non-Life Insurance Directives which have their registered offices in the European Union. This does not rule out the competent supervisory authority from seeking information on a related firm or a participating firm situated in a third country.

4.2.2. The ESC notes that it is very difficult to seek information on holding companies located in some third countries, both for the supervisory authorities and for the firm which, in relation to the holding company, is in the situation of a participating or related firm.

4.3. Article 3

4.3.1. The ESC's proposed new definitions for a parent undertaking, a subsidiary, and participation would lead to the scope of the adjusted solvency check within the meaning of Article 9 being limited ipso facto to links between parents and subsidiaries, which encompass all cases of joint or dominant influence and exclude all cases of significant influence, which would then come under the concept of participation.

4.3.2. Apart from the general comments which have already been made, it should be stressed that the exclusion clause provided for firms in third countries where access to information is difficult answers a need. But it creates a distortion of competition and is even an incentive to relocate.

4.3.3. The ESC proposes that the present proposal should contain an article similar to Article 8 of Directive 92/30/EEC on the supervision of credit institutions on a consolidated basis, and allowing the Commission to negotiate agreements with third countries on the basis of a mandate from the Council.

Such an article could be worded as follows:

'Additional Article:

1. The Commission may submit to the Council, either at the request of a Member State or on its own initiative, proposals with a view to negotiating agreements with one or more third countries on procedures for applying supplementary supervision of undertakings forming part of an insurance group to:

- insurance undertakings the parent undertaking of which has its registered office in a third country; and to

- insurance undertakings situated in a third country the parent undertaking of which has the form of an insurance undertaking, an insurance holding company or a mixed activity holding company and has its registered office in the Community.

2. The aim of such agreements shall be to enable the competent authorities of the Member States and those of the third countries to obtain the information necessary for the supervision of insurance undertakings situated within their jurisdiction.

3. The Commission shall examine with the Insurance Committee the result of the negotiations referred to in paragraph 1 and the situation arising from them.`

The initial negotiations could concern OECD countries outside the EEA where undertakings falling within the scope of the adjusted solvency requirement calculation in Article 9 have their registered offices.

4.4. Article 5

4.4.1. The ESC has noted the extremely binding nature of Article 5(2), which asks Member States to take the necessary steps to ensure that there are no legal impediments preventing the firms subject to this article or any other in the directive from exchanging among themselves any information which might be useful to the supervisory authority.

4.4.2. It is clear that some Member States will have to amend their company law in order to transpose this provision into their national laws, which will certainly give rise to considerable problems.

4.4.3. It is also clear that this obligation cannot in any way be imposed on third countries, which will in effect create a distortion of competition.

4.5. Article 6

The last sentence in Article 6(1) should be amended to read:

'The competent authorities may address themselves to the undertakings concerned directly to ensure the communication of the required information when such information is not provided by the insurance undertaking.`

Normally the supervisory authority should first contact the insurance firm which it is supervising. It is only when the latter does not provide the information requested that the supervisory authority should be able to contact firms which are not under its supervision.

4.6. Article 8

4.6.1. This key article concerns intra-group transactions. The reference to 'normal market conditions` in Article 8(1), which is a rough translation of the English expression 'arms length`, poses a problem even if the phrase 'in principle` limits its scope. In fact it has not been proved on the prudential front that intra-group transactions must be carried out according to market conditions in the insurance sector as in other economic sectors. This is particularly true as regards reinsurance transactions within the same group.

4.6.1.1. Another form of wording would be desirable in the French version and other versions where there is a translation problem, e.g. 'according to current practices`.

4.6.2. In the interests of equal competition the ESC wonders about the exhaustive nature of the cases mentioned in Article 8(1)(a) and (b), particularly the phrase 'natural person which holds a participation`, and about the usefulness of the phrase 'in particular` in Article 8(2) when the list of transactions which follows seems quite exhaustive. It should also be stated clearly whether or not reinsurance transactions are included in the list.

4.6.2.1. In addition the idea of 'significant` should be expressed more clearly, for instance by linking it to transactions which are subject to a specific, legally prescribed decision-making or monitoring procedure within a firm's management or supervisory bodies.

Article 8(2) could read as follows:

'2. Member States shall require at least an annual reporting by the insurance undertaking to the competent authorities of significant transactions as described in paragraph 1 which are subject to a specific, legally prescribed decision-making or monitoring procedure within a firm's management or supervisory bodies, and which concern loans, guarantees and other off-balance sheet transactions, elements eligible for the solvency margin, or investments.`

4.6.3. Finally, as regards intra-group transactions and, more generally, the whole of the proposal, one must ask questions about the particular problem of the co-existence of credit institutions and insurance firms within the same group. The present proposal only concerns groups which are mainly insurance groups but which may have holdings in banks. The latter will be subject to the own funds requirements set out in banking legislation, and the value of the insurer's holding in the bank will be taken into account when calculating solvency.

4.7. Article 9

4.7.1. The ESC would support deletion of the words 'or participating undertaking` in the first line of Article 9(2), since it is impossible for firms related to participating undertakings which have their registered offices in a third country outside the EEA to comply with the obligations set out in this article.

If the negotiations suggested in point 4.3.2 of the present Opinion do not reach a successful conclusion, it should be permitted to exclude the value of shareholdings in such firms from the total of own funds, whether consolidated or combined, rather than deduct a margin requirement for these subsidiaries.

The aim of this proposal is to limit the geographical scope of insurance group supervision to EEA countries, in line with the almost unanimous wishes of the supervisory authorities. The effect at a prudential level is to exclude the value of shareholdings in insurance firms situated in third countries outside the EEA from the total of own funds, rather than to calculate a margin requirement.

4.7.2. This article makes it compulsory to calculate adjusted solvency using one of the three methods described in Annex I. In accordance with Article 9(3), if the result is negative the competent authorities are to take appropriate measures at the level of the relevant insurance firm. This wording is ambiguous; does it refer to sanctions provided for on a 'solo` base? A clearer form of wording should be found, such as 'the necessary measures at the level of the insurance undertaking subject to the adjusted solvency calculation in accordance with Annex I of this Directive`.

4.7.3. Three problems also arise here:

- The choice of method is left up to the Member State but there is nothing in the directive to prevent several methods being used on the territory of the same Member State. It would be desirable to spell things out clearly to avoid differences of interpretation between Member States. The aim is that insurance firms should satisfy the adjusted solvency requirement according to one of the three methods.

One might add that groups established in several Member States could find themselves obliged to use several method, depending on the requirements of the various supervisory authorities to which they are subject.

- Groups which have subsidiaries or participations located in several Member States could find themselves obliged to choose between the different rules for calculating the minimum margin amount and covering the margin requirement.

An extra paragraph should therefore be added to Article 9, reading as follows:

'for the adjusted solvency calculation, the individual local rules on solvency shall apply.`

- The whole proposal is based on the principle that the three methods of calculating adjusted solvency are equivalent in prudential terms, a principle which it would be inopportune to call into question. Mutual recognition was in fact the only solution enabling account to be taken of the diversity of practices in force in the EU.

4.7.3.1. The ESC could nevertheless propose that the Commission draw up a report on implementation two or three years after the directive comes into force, so as to present the first results of the calculations on an objective basis. Such a solution, which is currently used in other sectors, would make it possible to reassure certain operators who fear the appearance of distortions of competition arising out of both the more or less strict margin requirements depending on the method adopted and the varying efficiency of national supervisory authorities.

4.8. Article 10

4.8.1. This article states that Member States should apply one of the supplementary methods of supervision in accordance with Annex II to insurance undertakings the parent undertakings of which are insurance holding companies.

The ESC's remarks on this subject in point 3.4.3 would lead to a recommendation that Article 10 be deleted, or at least re-written in such a way as to limit supervision of the external financing of insurance holding companies to that which weigh on the indebtedness of the insurance entities within the group.

4.8.2. The ESC is not quite clear about the status of this annex.

The reason for this is that if EU insurance firms subject to the directive are supervised, the danger which an insurance holding company may constitute for such firms may in certain cases be negligible while in others it may not, and it may even be at this level that the lack of own funds may appear, especially as the capital brought in by the holding company remains the property of the holding company, even in the event of bankruptcy.

4.8.2.1. The ESC has already noted that the sanctions mentioned in Articles 9 and 10 were not described in the same manner. It wonders what legal reasons would justify the use of two different adjectives and suggests, if there are none, that the same term, 'appropriate measures` (French: 'mesures appropriées`) be used, as is already the case in the English version.

4.9. Article 11

Article 11(2), which was introduced at the final stage in the procedure before the Commission adopted its proposal, authorises the Member States to derogate from the definition of a participation in Article 1(e) for four years and raise the threshold from 20 to 25 %. This provision would no longer have any purpose if the definition of a participation were changed, so the ESC recommends that it be deleted.

4.10. Annex I, paragraph 1

Paragraph 1 of Annex I sets out the general principles which apply to all methods.

Several clarifications seem necessary on technical matters.

4.10.1. Annex I.1 - Paragraph B(ii) - 1st and 3rd indents

The ESC considers that paragraph B could be worded more clearly as follows:

'B. Regardless of the method applied, the intra-group creation of fictitious elements must be eliminated in the calculation of the adjusted solvency situation.

For this purpose, and where the methods do not already provide for this, account shall not be taken of all the elements eligible for the solvency margin of the parent, participating, subsidiary or related insurance undertaking where these have no real value, even though they originate from an undertaking with which the undertaking being assessed has, directly or indirectly, a subsidiary or participating relationship.`

The aim of this amendment is to clarify the conditions under which fictitious intra-group transactions must be eliminated.

4.10.2. Annex I.1 - Paragraph C

In the interest of clarity the expression 'pourcentages relevants` in the French version ('relevant percentages`) could be replaced by 'pourcentages respectifs` or 'pourcentages pertinents` (does not apply to the English version).

4.10.3. Annex I.1 - Paragraph C: Footnote (1)

The ESC welcomes the explanation provided by the footnote since it allows certain Member States to choose between full and proportional consolidation.

Here too, 'relevant` in the French version should be translated by 'respectif` or 'pertinent`.

4.10.4. Sub-section D refers to four EU directives for the procedures for assessing the value of assets and liabilities. A further reference should be added to the Directive 91/674/EEC of 19 December 1991 concerning the annual accounts and consolidated accounts of insurance firms. Such a reference is important for international groups which are obliged to comply with local assessment methods on account of their subsidiaries and holdings in third countries.

4.10.5. Annex I,4 - Non-specified cases

In order to restore a less obligatory tone to what is an option left to the competent authorities, the ESC suggests the following wording:

'The competent authorities will see that in cases that are not covered in 2.1-2.3 an appropriate combination of the described methods is used.`

The ESC also feels that it would be desirable for a Protocol to be concluded between supervisory authorities, so as to provide the guarantees necessary for proper co-operation in the exchange of information and a consistent use of the method for calculating adjusted solvency, especially in non-specified cases and as regards the treatment of undertakings in third countries (point 4.7.2).

Done at Brussels, 27 March 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 341, 19. 12. 1995, p. 16.