Opinion of the Economic and Social Committee on the "Proposal for a Directive of the European Parliament and of the Council amending Council Directive 79/267/EEC as regards the solvency margin requirements for life assurance undertakings"
Date: 2001-04-25
Institutions: European Economic and Social Committee
Subjects: financial solvency, insurance company, life assurance

10.7.2001

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Official Journal of the European Communities

C 193/21

5.2.
A number of points nevertheless seem to merit clarifi-
cation or amendment. In particular, the Committee calls on
its concerns in the
the Commission to take account of
following areas:

— the account taken of reinsurance and its quality to be

taken into account (4.1.2);

— the existence of a guarantee fund for policyholders (4.1.3);

— the specific case of substitution (point 4.1.4);

— harmonisation of the solvency margin requirements and
the minimum guarantee funds for small companies
(points 4.1.1 onwards);

— run-off companies (4.2.3);

— supplementary contributions (4.2.4).

Brussels, 25 April 2001.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Proposal for a Directive of the European
Parliament and of the Council amending Council Directive 79/267/EEC as regards the solvency
margin requirements for life assurance undertakings’

(2001/C 193/04)

The Council decided to consult the Economic and Social Committee, under Article 262 of the Treaty
establishing the European Community, on 13 December 2000 on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 10 April 2001. The rapporteur was
Mr Pelletier, and the co-rapporteur was Mr Vaucoret.

At its 381st plenary session on 25 and 26 April 2001 (meeting of 25 April), the Economic and Social
Committee unanimously adopted the following opinion.

1.

Introduction

proposals for directives have been prepared by the European
Commission (2).

1.1.
The solvency margin constitutes a key element in the
supervision of insurance companies. It allows the financial
soundness of these businesses to be ascertained and with that
their ability to honour their commitments in the event of risks
materialising unexpectedly. The required solvency margin is
one of the most long-standing items of European insurance
harmonisation, since it was established with the first life and
non-life directives (1). Because it was introduced such a long
time ago,
it has become necessary to bring the required
solvency margins up to date, and it is for this reason that two

1.2.
The two proposed directives are designed to enhance
the protection of insurance policyholders by improving the
rules regarding the solvency margin of insurance undertakings.
The two proposals have many measures in common.

1.3.
The proposed directives are only aimed at the regulat-
ory principles for determining the solvency margin and exclude
other elements which might also contribute to a company’s
solvency in the broadest sense of the term, such as carefully
estimated technical provisions and properly invested assets.

(1) First non-life Directive 73/239/EEC — OJ L 228, 16.8.1973, p. 3;
First life Directive 79/267/EEC — OJ L 63, 13.3.1979, p. 1.

(2) COM(2000) final — 2000/0249 (COD) and COM(2000) 634

final — 2000/0251 (COD), of 25.10.2000.

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2.

Background

2.1.
Required solvency margins (RSMs) were established by
the first non-life directive of 24 July 1973 (73/239/EEC) and
the first life directive of 5 March 1979 (79/267/EEC).

2.2.
Directives 92/49/EEC of 18 June 1992 (third non-life
directive) (1) and 92/96/EEC of the Council on 10 November
1992 (third life directive) (2) did not alter the required solvency
margins, as any amendments to these would have held up
their adoption. However,
that such
amendments might be necessary, in Article 25 and Article 26
respectively of these two directives the Community legislator
provided for the Commission to ‘submit a report to the
Insurance Committee on the need for further harmonisation
of the solvency margin’.

in view of

the fact

Subsequently, the Conference of the Insurance Super-
2.3.
visory Authorities of the Member States of the European
Union, under the chairmanship of Dr Muller, drafted a report
on the solvency of insurance undertakings, known as the
‘Muller Report’. This report was approved by the Conference
of Supervisory Authorities in April 1997. The final European
Commission report, dated 24 July 1997(3), was to a great
extent based on the study carried out in the Muller report and
concluded that there might be a need to improve the solvency
margin.

2.4.
The Commission’s work on this subject, from summer
1997 onwards, produced the two proposals submitted on
25 October 2000.

2.5.
In the longer term, particularly in the context of the
reports on the implementation of the draft directives, the
intention is to carry out a fundamental review of the methods
employed for analysing the overall
financial position of
insurance companies. This exercise is known as ‘Solvency II’.

3. General comments

3.1.
The Economic and Social Committee considers that the
European Commission’s working methods in the ‘Solvency I’
exercise have been exemplary as regards the consultation of
people in the profession. Professional bodies, including the
CEA, the ACME, AISAM (4) and the consultative group of

(1) OJ L 228, 11.8.1992, p. 1.
(2) OJ L 360, 9.9.1992, p. 1.
(3) Report to the insurance committee on the need for further
harmonisation of the solvency margin, COM(97) 398 of 24.7.
1997.

(4) CEA — European Insurance Committee; ACME — European
Insurers’ Association; AISAM — a
Cooperative and Mutual
European mutual association with a particular focus on small
mutuals.

European actuaries were indeed consulted by the Commission
from February 1996 onwards and throughout the ‘Solvency I’
exercise.

The main changes proposed by the Commission relate

3.2.
to the following seven points:

to

for

compared

EUR 500 000

The new directives would only apply to mutual
3.2.1.
associations whose contribution income is EUR 5 million or
above,
and
EUR 100 000 000 for non-life at the moment. Mutual associ-
ations whose contribution income is below the EUR 5 million
threshold would not have the benefit of the single passport
and would remain subject to national prudential requirements.
Nevertheless, even if their contribution income lies below this
threshold, a mutual association satisfying the solvency margin
requirements could ask to come under the new directive and
benefit from the single passport.

life

The value of the minimum guarantee fund (MGF)
3.2.2.
will be increased and in the future indexed in line with
inflation.

3.2.3.
The new directives would grant life insurers the right
to count 50% of the undertaking’s future profits in the available
solvency margin; these future profits would no longer be
estimated on a retrospective basis, as today, but on the basis
of the following six years. Nevertheless, they would have to be
confirmed by an actuarial report and their annual average
could not exceed that of the five previous years.

3.2.4.
Amongst the items eligible for the solvency margin,
cumulative preferential share capital, subordinated loans and
securities with no specified maturity dates would be subject to
a number of restrictions, while the unpaid share capital or
initial fund would no longer be accepted unless with the
agreement of the competent authorities, and then only up to
50% of the solvency margin. Moreover, insurance companies
would lose the possibility of counting, in the solvency margin,
own shares which they hold directly and would also lose the
benefit of discounting non-life technical provisions (hitherto
Member States could authorise explicit discounting, taking
account of investment income in accordance with Article 60
paragraph 1(g) of Directive 91/674/EEC) (5). Moreover, wheth-
er or not supplementary contributions by members for mutual
insurance companies in the non-life sector can be taken into
account in the solvency margin would be subject to approval
by the supervisory authorities. It should be added that the list

(5) Council Directive 91/674/EEC on the annual accounts and
insurance undertakings, OJ L 374,

consolidated accounts of
31.12.1991, p. 7.

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of eligible items for the solvency margin would henceforth be
divided into three ‘closed’ categories; hitherto this list was
‘open’ and items other than those listed could potentially be
included. Lastly, it should be noted that the minimum guaran-
tee fund would henceforth only be constituted from higher
quality items, which would exclude in particular future profits
(although these would still be included in the solvency margin)
and the unpaid share capital or initial fund. Hidden reserves
may on the other hand be included if they are part of the
solvency margin.

out below in the specific comments. More generally, the
Committee is in favour of the spirit of the proposed texts
except the part concerning the principle of minimum harmon-
isation.

3.5. The principle of minimum harmonisation

3.2.5.
Calculation of the required solvency margin would
undergo a major change in non-life insurance: the solvency
margin requirement would be increased by 50% for classes 11,
12 and 13, corresponding to general liability and aviation and
marine liability.

3.5.1.
The proposed directives stipulate that Member States
would be free to establish more stringent rules for the
undertakings they authorise than those contained in the
directives, so as to take into account the specific features of
their national markets. This is clearly set out in the fourteenth
recital of the proposed non-life directive and the eleventh
recital of the proposed life directive.

3.2.6.
The directive would authorise the competent auth-
orities to intervene on a pro-active basis before the available
solvency margin dipped below permitted levels, as soon as
policyholders’ rights were threatened. The authorities could in
this case require a financial recovery plan to be submitted
and/or a higher solvency margin to be introduced and could
downvalue some assets.

3.2.7.
This directive would remove the current ambiguity
about whether Member States are free to establish more
stringent rules for the undertakings they authorise. The
Commission proposes giving Member States the freedom to
decide on this issue, thereby operating a ‘minimum harmonis-
ation’.

3.3.
The proposed directives therefore update the solvency
requirements by changing a number of thresholds: the level of
contribution income above which the directives apply to
mutual associations and the minimum value of the guarantee
fund; the premium levels separating the two portions to which
the rates of 18% and 16% are applied for calculating the
solvency requirements for non-life undertakings; and the level
of claims also determining the two portions to which the rates
of 26% and 23% are applied for calculating the solvency
margin requirements. The proposed directives also detail the
solvency rules, setting out a complete list of the items eligible
for establishing the margin and adjusting the calculation of the
solvency margin for those classes of business with particularly
volatile risk profiles. Lastly, the proposed directives strengthen
policyholders’ protection by granting supervisory authorities
power of early intervention.

For these three reasons the Committee approves the
3.4.
proposed directives. It nevertheless raises a number of technical
points which it recommends be altered; these points are set

3.5.2.
The Committee is aware that this may be just one
stage in the process of building up the single insurance market,
it deems it absolutely necessary that a more global
but
in the future. The Committee
harmonisation be sought
approves in particular a number of provisions in the proposed
directives which are working to this end, for example with-
drawal of the benefit granted to undertakings which were
discounting technical provisions. However, under the mini-
mum harmonisation principle, some undertakings could be
subjected to more stringent solvency requirements by their
national supervisory bodies than undertakings in other Mem-
ber States; this obligation to comply with a stricter solvency
margin requirement would increase the cost of their capital
and could therefore reduce their profitability. That would
create distortions of competition and run counter to the
principle that the single market should be a level playing field.
This concern is all the greater with the prospect of the
enlargement of the single market.

It

therefore seems to the Committee that other
3.5.3.
phases will have to be introduced once these proposals
have been adopted. These should work towards maximum
harmonisation of competition rules so that European insurance
companies can carry out
their activities in perfectly fair
conditions which protect policyholders’ rights.

3.6. Power of early intervention by supervisors

The new Articles 20a in the non-life directive and
3.6.1.
24a (2) in the life directive grant supervisory authorities the
power of early intervention in the event of these authorities
deeming policyholders’ rights to be threatened. Under these
the supervisory authorities can require an
circumstances,
undertaking to submit a financial recovery plan or increase its
required solvency margin.

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3.6.2.
The Committee supports a measure of this type in
principle because it allows the supervisory authorities to
intervene at an early stage where it is easier to turn around a
company’s financial situation. Such a measure improves
policyholders’ protection by encouraging a risk prevention
approach.

3.6.3.
However, the Committee recommends that such a
preventive approach be framed by a minimum of objective
rules: in short, this would involve a precise definition of the
early intervention conditions to ensure that such intervention
is warranted,
the financial
in keeping with the scale of
problems involved and effective for solving these problems.

4.

Specific comments

4.1. Provisions common to the proposed life and non-life directives

4.1.1. A r t i c l e s

1 7
A r t i c l e s 2 0 a n d 2 0 a
g u a r a n t e e f u n d

a n d

1 7 a

n o n - l i f e

a n d
l i f e : m i n i m u m

4.1.1.1.
These articles raise the value of the minimum
guarantee fund to EUR 3 million, for both life assurance
undertakings and non-life insurance undertakings classes 10
to 15, and to EUR 2 million for other non-life insurance
undertakings. For the future they establish an indexation of
these minimum levels in line with inflation.

The Committee approves inflation-linked indexa-
4.1.1.2.
tion because this means that the values of the minimum
guarantee funds can keep pace with economic developments.
However, the Committee does regret that the new values of
the minimum guarantee funds and the solvency margin
requirements are not consistent with each other: with the
proposed threshold, the solvency margin requirements could
fall below the guarantee fund requirement, which goes against
the idea behind these two prudential requirements.

4.1.1.3.
Thus the amounts set out in the proposed directive
could turn out to be inconsistent for small mutual associations
with contribution incomes near to EUR 5 million. For example,
a mutual association reinsured at 50% carrying out a non-life
insurance activity and with an annual contribution income of
EUR 5 million would be subject
to a solvency margin
requirement equal to a maximum of 18% × 5 million × 50%,
i.e. EUR 450 000 . Now, under Article 17 of the directive, the
guarantee fund for a mutual association of this type should
not be below EUR 1,5 million (EUR 2 million less the specific
reduction granted to mutual associations); the guarantee fund
requirement would therefore be higher than the solvency
margin requirement and this would be in contradiction with
the definitions of these two amounts, since the guarantee

fund is defined as being one-third of the solvency margin
requirement. It therefore seems necessary to review the two
thresholds so as to make them consistent with one another.

4.1.1.4. Moreover, so that the rise in the cost of the
‘entrance ticket’ does not slow down new companies’ pen-
etration of this market sector, the Committee proposes that, for
newly formed companies, the establishment of the additional
margin necessary for achieving the minimum level for the
guarantee funds be staggered over a maximum of five years,
with the agreement of the supervisory authorities. For example,
an insurance company which has just been set up and which,
because it still does not have a great deal of business, has a
margin requirement of EUR 2 million and has to have available
a minimum guarantee fund of EUR 3 million, would be able
to establish the additional million euros over five years. This
would in no way jeopardize policyholder security, since the
advantage of this five year period would be that it coincides
with the special supervision period for new companies.

4.1.2. A r t i c l e s 2 0 a n o n - l i f e a n d 2 4 a ( 4 )

l i f e :

r e i n s u r a n c e

4.1.2.1.
The solvency margin requirement is at present
reduced in proportion to the percentage of risks underwritten
by the reinsurance, within given limits (50% for non-life
insurance for example): therefore, the more an undertaking is
reinsured, the lower its margin requirement. Even where the
reinsurance percentage is lower than the maximum possible,
the supervisory authorities would henceforth be empowered
to decrease the reduction to the required solvency margin,
applicable on the basis of the reinsurance, when the quality of
the primary insurer’s reinsurance programme is deemed by
them to be inadequate.

4.1.2.2.
The Committee recommends that, in addition to
this possibility of a downward adjustment, there should also
be the possibility of an upward adjustment which would
likewise take account of the quality of the reinsurance pro-
gramme, particularly the level of solvency of the reinsurers. In
fact the 50% ceiling laid down in the current directives is an
arbitrary one and is not verified by an assessment of the
optimum potential quality of the reinsurance. However, as
soon as this concept of quality is introduced, the possibility of
assessing the quality of the reinsurer is implicitly recognised,
and it must then be possible to use this assessment for both
increasing and decreasing the ceiling for reducing the margin
requirement.

This possibility could be referred to at the end of
4.1.2.3.
paragraph 4 using the following wording: ‘Member States shall
also ensure that the competent authorities have the power to
increase the reduction to the solvency margin as determined
in accordance with Article 19, where they deem that the
quality of a reinsurance programme warrants an increase of
this type’.

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4.1.2.4.
The Committee underlines that any change to the
ceiling, be it upwards or downwards, would be optional and
subject to authorisation from the supervisory authorities. In
order to avoid any distortion of competition, the assessment
of the reinsurer’s quality should therefore be based on objective
criteria:
the Committee would like the establishment of
reinsurance supervision in Europe ultimately to allow the
definition of these objective and harmonised criteria.

4.1.3. T h e e x i s t e n c e o f a g u a r a n t e e f u n d f o r

p o l i c y h o l d e r s

4.1.3.1.
Some European countries have ‘collective’ arrange-
ments for (fully or partially) underwriting liabilities taken with
regard to policyholders in the case of run-off.

Two types of fund are being established: private
4.1.3.2.
funds and public funds. The private funds serve to protect all
the companies grouped under those funds; public or semi-
public funds are set up to cover the whole of a given profession
and are designed to compensate policyholders in the event of
run-offs in the sector.

Neither the proposed directives nor the Muller
4.1.3.3.
report broached this issue. However, in some cases the solution
has consisted of accepting all or part of the reserves of
contribution income not paid into the guarantee fund in
establishing the solvency margin. The Committee feels that the
treatment of contribution income in the guarantee funds
should be examined at European level.

4.1.4. T h e s p e c i f i c c a s e o f s u b s t i t u t i o n

In the event of a mutual

4.1.4.1.
insurance association
passing on all its liabilities to another association, the transferee
is then in a situation where it is providing complete substi-
tution for the liability of the transferor. In this case it should
only be possible to calculate the solvency margin on the basis
of the transferee’s situation. This substitution option was
introduced under Article 3(2) of Directive 79/267/EEC (non-
it would seem, under Article 3(2) of Directive
life) and,
79/267/EEC (life). There is an obvious conflict between
the provisions of Article 3(2) authorising substitution and
Article 16(a) point 4 which limits to 50 % the reinsurance
borne by the transferor. Subject to analyses or opinions to the
contrary from the European Commission, we suggest that the
end of paragraph 7 of Article 16(a) point 4 read as follows:

‘this ratio may in no case be less than 50 %, except in the event
of the application of Article 3(2) of the present Directive’.

4.2. Provisions specific to the proposed life directive

4.2.1. A r t i c l e 1 8 ( 4 ) ( a ) : f u t u r e p r o f i t s

the conditions

This paragraph alters

4.2.1.1.
the
inclusion of future profits in the available solvency margin.
The period for advance estimation of profits is reduced from
10 years to 6 and must now be justified by an actuarial report.
Moreover, the annual average of future profits must not exceed
that of the profits of the five previous years.

for

4.2.1.2.
An upper limit on future profits is valuable: such
estimates anticipate the future and their amount is likely to be
significantly affected by unforeseen events; they must therefore
not make up too large a part of the solvency margin.

4.2.1.3.
However, the Committee would recommend a
more forward-looking approach to these future profits. Such
an approach is hampered by the proposed mechanism of
setting an upper limit on future profits using the average
profits over the last five years. This penalises those companies
which, against a background of falling interest rates, have
demonstrated caution by raising their provisions, thus reducing
their past profits. It runs counter to the thinking behind future
profits.

An upper limit of another type, i.e. a percentage of
4.2.1.4.
the margin, could be envisaged here. Moreover, insofar as an
upper limit of this type were to be established and a calculation
of future profits were to be justified by an actuarial report, the
reduction of the calculation period from ten to six years would
no longer be necessary.

Following this line of
the Committee suggests
thinking,
replacing the first sentence of Article 18(4)(a) with the
following:

‘An amount equal to 50 % of the undertaking’s future
profits. The amount of future profits shall be evaluated as
the net current value of the net overall profits of the
undertaking calculated over the following ten years. This
amount cannot exceed 50 % of the total of all the other
elements making up the solvency margin mentioned in
this article.’

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4.2.1.5.
It should be noted that the actuarial report submit-
ted to the supervisory authorities would really be useful here
the net
because it would help justify the calculation of
(discounted) current value of the net overall profits. Thus the
actuarial report could clarify the method for calculating the
different values of profits forecast over the next few years and
give the updating rate used.

4.2.2. A r t i c l e 1 9 ( 2 ) ( a ) :

t h e b a s i s o n w h i c h

t h e s o l v e n c y m a r g i n i s c a l c u l a t e d

As regards the basis used for calculating the
4.2.2.1.
solvency margin, it is recommended that the meaning of the
expression ‘life assurance provision’ be clearly set out in the
text.

In fact, the term ‘life assurance provision’ seems
4.2.2.2.
here to mean a ‘mathematical provision’, but
it can be
understood as covering a broader field than just ‘mathematical
provision’. In addition to mathematical provisions, it would
cover all technical life assurance provisions, such as provision
for financial risks or provision for technical liability underwrit-
ing risks. While the mathematical provisions do represent the
net actuarial value of liabilities to policyholders, the other
technical provisions of life assurance cover specific risks such
as sharp fluctuations in share prices. Taking these technical
provisions into account in the calculation of the solvency
margin would in fact boil down to requiring capital for risks
which, by definition, have already been covered. For this
reason the Committee advocates clarification of the meaning
of the term ‘life assurance provision’; this can be done by

Brussels, 25 April 2001.

referring to the 1991 accounting directive as follows: after ‘life
assurance provision’, add ‘as defined by Article 27 of Directive
91/674/EEC’ (1).

5. Conclusions

The Committee welcomes the European Commission

5.1.
proposal for a directive and approves it as a whole.

5.1.1.
Although the new measures are likely to improve the
quantity aspect of the solvency margin, the other approach,
consisting of improving its quality by more precise regulation
of its component assets, has not been dealt with in this review
exercise. The ESC therefore hopes that the Solvency II project
will provide an opportunity to explore this second approach.

5.2.
A number of points nevertheless seem to merit clarifi-
cation or amendment. In particular, the Committee calls on
the Commission to take account of
its concerns in the
following areas:

— harmonisation of the solvency margin requirements and
the minimum guarantee funds for small companies
(points 4.1.1 onwards);

— the account taken of reinsurance and its quality to be

taken into account (4.1.2);

— the existence of a guarantee fund for policyholders (4.1.3);

— the specific case of substitution (point 4.1.4);

— the account taken of future profits (4.2.1);

— the basis on which the solvency margin is calculated

(4.2.2).

(1) Council Directive 91/674/EEC on the annual accounts and
insurance undertakings, OJ L 374,

consolidated accounts of
31.12.1991, p. 7.

The President

of the Economic and Social Committee

Göke FRERICHS