Opinion of the European Economic and Social Committee on the Proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance SOLVENCY II COM(2007) 361 final — 2007/0143 (COD)
Date: 2008-05-29
Institutions: European Economic and Social Committee
Subjects: codification of EU law, consumer protection, financial solvency, freedom to provide services, insurance, insurance company, insurance law, right of establishment

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Official Journal of the European Union

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5.4.1
The Carer is truly an important factor in the whole
welfare process even within AAL. Hence a paradigm shift
should be aimed not only at the organisation level but also at a
Carer level in order to ensure that the person who is having the
direct contact with the person requiring AAL will not only be
proficient in such technology but truly believes in the use of
such technology so as to also further inspire the confidence of
the person in such tools as a better means to quality of life.

5.4.2
The EESC also considers that the health system should
be thoroughly scrutinised in order to ensure that not only there
is organisational readiness for AAL but that Health and Social
Care organisations can actually cope with having more people
at home.

5.4.3
Furthermore with the adoption of AAL it is even more
crucial that the cooperation and coordination between Health

Brussels, 29 May 2008.

organisations and Social organisations is improved. There again
technology can be a tool to improve such cooperation however
more crucial is the mindset of the need and will to cooperate.

5.5
It is envisaged that AAL systems shall be complex, there-
fore interoperability should be one of the key objectives within
this programme. The innovation and technology should be wide
scaled, customised, integrated and proactive.

The EESC believes that

5.6
the Commission should also
adopt an integrated approach to AAL and policies such as Life
Long Learning. In fact, training under such policies, in particular,
should also be targeted at
the AAL
programme as training is an integral part of the success of such
technology.

the stakeholders of

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS

Opinion of the European Economic and Social Committee on the Proposal for a directive of the
European Parliament and of the Council on the taking-up and pursuit of the business of Insurance
and Reinsurance SOLVENCY II

COM(2007) 361 final — 2007/0143 (COD)

(2008/C 224/03)

On 31 October 2007 the Council decided to consult the European Economic and Social Committee, under
Articles 47(2) and 251 of the Treaty establishing the European Community, on the

Proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of
Insurance and Reinsurance — SOLVENCY II (*)

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 6 May 2008. The rapporteur was Mr Robyns de
Schneidauer.

At its 445th plenary session, held on 28 and 29 May 2008 (meeting of 29 May), the European Economic
and Social Committee adopted the following opinion by 67 votes, with one abstention.

1. Recommendations

preserves its right to express its views about new features with
regard to the relation between consumers and (re)insurers in
due course, more specifically within the framework of
the
Commission's recent initiatives regarding retail financial services.

1.1
The EESC commends the Commission for the disciplined
recast of many complex directives in one clear document while
taking into account the rules governing the recast parts of the
work. Since the EU legislative framework should not only focus
on prudential policy, which deals with the part capital plays in
providing insurance services that are important to the business
the EESC
and citizens of Europe in many other

regards,

(*) The proposal was later amended to become COM(2008) 119 final. In
this opinion the numbering of the articles in the Directive relates to
this, the most recent version of the proposal for a Directive.

The EESC calls on the Commission to further pursue the
harmonisation of
the relationship between
policyholder and insurer, as is currently being examined in the

legal aspects of

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‘common framework of reference’
conduct of DG Sanco.

(CFR) exercise under the

time to take the adequate measures to resolve the situation after
the breach of the SCR.

1.2
The EESC broadly endorses the proposed Solvency II
Framework Directive of the Commission and salutes the exten-
sive consultation that has preceded it. The approach of the
Commission has been in line with the Better Regulation princi-
ples it has set for itself. However, consultations on such reforms
should pay due attention to the views of employees and consu-
mers, who have an obvious interest in the outcome of the
proceedings. The EESC invites the Commission to develop
proper fora, like FINUSE, for these consultations to take place.

The EESC welcomes

1.3
the adoption of a risk-based
economic approach to assess the solvency capital requirements
of
insurance companies and a total balance sheet approach,
based on a full economical evaluation of assets and liabilities, to
assess their financial situation. This aims at reflecting correctly
the true underlying exposures of risk and risk mitigation tools
of the undertakings. This approach, besides being economically
correct, has the advantage to avoid any regulatory arbitrage
opportunity and, at the same time, to ensure the same adequate
level of protection to all policyholders across Europe, indepen-
dently of the legal status, size or location of the company.

1.4
The EESC highly welcomes the introduction of the three
pillar approach to prudential supervision which is consistent
with the Basel
II capital requirements as introduced in the
banking sector while recognising the specificities of the insur-
ance sector. The EESC would like to underline the importance
of the addition of the supervisory review process and qualitative
requirements (Pillar II) as well as introducing principles to regu-
late supervisory reporting and public disclosure (Pillar III)
in
addition to the definition of the quantitative risk-based capital
requirements,
for the adequacy of prudential supervision of
insurance undertakings.

1.5
The EESC welcomes the introduction of a solvency
system based on two capital requirements, the Solvency Capital
Requirement
(SCR) and the Minimum Capital Requirement
(MCR), with each of them having a different purpose. The SCR
should reflect a target level of capital that an entity should aim
to meet under normal operating conditions, while the MCR
should reflect a level of capital below which ultimate supervi-
sory action should be triggered. The EESC would welcome Level
the conditions
II
governing the simplified SCR calculation (Art. 108), as well as
about the circumstances that would trigger a request for addi-
tional solvency capital.

regulation to bring further clarity about

1.6
The EESC is of the opinion that the MCR and the SCR
calculations should be aligned closely and therefore be both
based on a risk-sensitive approach, in order to allow for the
proper implementation of an escalating ladder of supervisory
interventions which ensures that both the respective insurance
company as well as the supervisory authority have sufficient

1.7
The EESC welcomes the principle of proportionality
included in the proposed Directive, which would allow for
Solvency II to be applied by all the undertakings. The EESC
would welcome Level II Regulation to bring further clarity in
this general principle of proportionality (Art. 28,3), so that the
adequacy of requirements and, if needed, corrective measures,
can be construed in a more secure way; this should, however,
not lead to regulatory sclerosis. The EESC recommends that this
principle is applied effectively and consistently across Europe,
with effective ways of appeal by administrative process or if
needed in court to guarantee this.

The EESC strongly suggests the Commission to preserve
1.8
the diversity of the insurance market by taking into account the
role of small and medium size insurers as well as of mutual and
cooperative insurance societies. Since many of these operate in
niche markets, the EESC considers it of great importance that
some flexibility to the standard approach is allowed to recognise
for example the use of own, more relevant, data and generally
accepted methodologies, without, however, disturbing a fair
competition between insurance undertakings. Due analysis and
consideration should be given to the possibility of mutual insur-
ance companies to call on their members to shore up their
solvency status as has been seen in practice.

1.9
The EESC recognises the importance of the supervision
of insurance groups which, while relatively small in terms of
number of undertakings, do constitute a large share of the insur-
ance market within the EU. The EESC therefore considers the
introduction of group supervision as an important step forward
which will allow all the group supervisors and the other supervi-
sory authorities involved to improve their understanding of the
risk profile of the group as a whole. Maximum harmonisation
and transparency of these supervisory authorities and clear divi-
sion of responsibilities between them is recommended.

1.10
The EESC welcomes the introduction of an optional
regime that allows groups to facilitate their capital management
improving the mobility of capital within the
at group level,
group and providing a practical and transparent system for a
group to benefit from the recognition of diversification effects
at group level without affecting the level of the capital require-
ments of the subsidiaries of the group. It will be necessary to
consider the actual capital
the
group, since a part of these will be covered by declarations of
group support rather than by available liquid or equivalent
assets. The EESC notes that group diversification effects will
only be recognised by using the default method for the calcula-
tion of the SCR and that the proposal also should allow for the
recognition of group diversification effects without the use of
group support.

the subsidiaries of

levels of

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1.11
The Committee recommends evaluating the impact of
the proposed optional regime on competition at local level, the
degree of consumer protection in normal as well as crisis situa-
tions, which should not be lower than the degree provided
under the default regime, and clarification of legal and practical
issues, including security of cross-border fund transfers between
different companies within a group, namely possible legal
constraints, at national level, to capital (group support) transfers
to a subsidiary located in another Member State.

The EESC expects the Level II authorities to take into
1.12
account
the quantitative
the fourth phase of
the results of
impact study (QIS4) which was under way at the time of the
adoption of this opinion.

1.13
The EESC insists on the need for a well harmonized
application of the directive, avoiding goldplating or diverging
policies through the use of options which would endanger a
uniform prudential policy across the single market.

1.14
The EESC calls on the Commission to ensure the
predictability of prudential practice, in order to give insurance
undertakings the level of certainty they can expect in developing
their risk and solvency policy.

1.15
The EESC recognises the importance for Solvency II of
aspects of risk mitigation like sharing reliable data between
insurers and insurance pools. They facilitate market access for
newcomers to a market and smaller operators and allow them
to increase available capacity as well as to reduce the uncertainty
margins on their premiums. The EESC therefore urges the
Commission to consider this correlation in its review of the
Block Exemption Regulation for the insurance sector.

The EESC congratulates the Commission and Lamfa-
1.16
lussy committees involved, for the leading role they have taken
up in this reform process in applying best practices and raising
awareness in the whole European market. The proposed direc-
tive sets a real benchmark for many other jurisdictions and
financial
sectors. However, consultations on such
reforms should pay due attention to the views of employees and
consumers, who have an obvious interest in the outcome of the
proceedings. The EESC invites the Commission to develop
proper fora, like FINUSE, for these consultations to take place.

services

The EESC urges the Commission to bring the solvency
1.17
provisions of other providers, irrespectively of their nature, of
similar financial services up to the level of the Solvency II direc-
tive under the ‘same risks, same rules’ principle. In view of vola-
tile financial markets, consumers or beneficiaries must not be
denied the same advanced solvency protection. And a level
playing field regarding solvency capital requirements is also
essential
in the
to promote a fair competitive environment
financial market.

1.18
The Solvency II principles should be the benchmark for
the introduction of new solvency standards, for example in the
framework of the IORP (1) directive review in 2008, especially
with regard to the development of the duties of private pension
providers throughout the Union.

2. Introduction

2.1
The present proposal for a Directive for a new solvency
framework for private insurance and reinsurance undertakings,
called Solvency II, is introducing a revised regime in order to
ensure a better protection of policyholders and beneficiaries,
the single EU insurance market and
deepen integration of
improve international competitiveness of EU insurance industry
as a whole as well as of the individual insurers and reinsurers.
At the same time, the proposal unifies several generations of
insurance directives in one single recast directive. This frame-
work is to be applied both to insurance and reinsurance under-
takings.

Through an elaborate and ongoing consultation with all
2.2
stakeholders, the Commission and the Lamfalussy committees
involving regulators and supervisors have taken a leading role in
setting up leading-edge practices in a global environment, parti-
cularly in the field of financial services. As a result, Solvency II
is among the most sophisticated set of insurance solvency rules
in the world and puts Europe well ahead of most other jurisdic-
tions. However, consultations on such reforms should pay due
attention to the views of employees and consumers, who have
an obvious interest in the outcome of the proceedings. The
like
EESC invites the Commission to develop proper
FINUSE, for these consultations to take place.

fora,

3. Background

The proposed solvency framework aims at improving the
3.1
financial stability and reliability of
the European insurance
market. This should benefit both the competitiveness of the EU
insurance industry as a whole as well as of
the individual
insurers and reinsurers and the consumer in safety terms. Reli-
able insurance markets are of crucial importance for the social
and economic fabric of the European Union.

First and foremost, insurance acts as a tool of individual
3.2
as well as collective protection.
Insurance customers include
private households, SMEs, large corporations, associations and
public authorities. The commitments of insurance companies
concern dependents and third parties as well as the actual custo-
mers of insurance services. The EESC is particularly aware of
this impact on the everyday life of
the European citizens.
Besides its importance in the markets of protection in the event
of death, insurance has become a significant provider of savings
Insurance takes part in the management of social
products.
countries),
schemes,
security

such as pensions

(Nordic

(1) Institutions for Occupational Retirement Provision.

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workmen's compensation (BE, FI, PT) and national healthcare
systems (IE, NL), often within a framework involving workers'
representatives. Insurance is a provider of employee benefits that
are of rapidly increasing importance for the workforce — an
important stakeholder. It does provide for protection against
new risks like natural catastrophes, crop insurance and terrorism
as well, sometimes through partnerships between (re)insurers
and governments.

of a mother and daughter companies, but also include joint
ventures, holding structures and so on. The 20 largest groups
collect about half of the European premium income (9). A signif-
icant market share resides with mutual and cooperative insur-
ance societies. The latter are often intrinsically connected with a
large number of civil society organisations, and account for 30 %
of the overall premium income in Europe (10).

3.3
The insurance market functions as an important lever for
the economy as a whole, supporting initiative and building
trust, and it is a considerable economic factor itself, creating
for close to a million employees in Europe (2). The
jobs
Commission has estimated the proposed directive to entail extra
investments of 2 to 3 billion euros for insurers and supervisors.
It is expected that a very large part of these investments will be
spent on human capital, creating lasting highly qualified jobs
locally (among which risk managers, actuaries, ICT experts and
compliance officers). The EESC considers this investment should
provide value to all stakeholders including consumers and bene-
ficiaries.

3.4
In addition to this direct employment, insurance distribu-
tion through agents and brokers and their own employees adds
another million jobs.

Through investments which reach an amount of more than
6 500 bn euro (3), insurance and reinsurance undertakings are
important institutional investors. As such they are responsible
for transforming individual premiums into a pool of financial
assets in due proportion to the risks borne, and for the medium
to long-term security of the policyholders and beneficiaries.

3.5
Households, SMEs, larger corporations, associations and
public bodies contribute premiums that are equal to more than
5 % of GDP for life insurance (4) and more than 3 % for non-
life insurance. Even in mature markets, the growth rate of insur-
ance exceeds the growth of the economy as a whole most of the
time. Insurers'
investments represent more than 50 % of the
GDP (5), half of it in fixed income assets and loans (6), while the
total variable yield investments of the insurers are about equal
to a quarter of the European stock market capitalisation (7).

Even if the recent history of the insurance industry has
3.6
seen many mergers,
there are still about 5 000 insurance
companies in Europe (8). Large financial groups may have
different
insurance subsidiaries in different countries. Group
structures in the insurance industry can encompass different
types of activity within the insurance industry (reinsurance, life
and/or non-life insurance,
insurance mediation) or within the
wider context of financial services (including banking — bancas-
surance — and mortgages). Moreover, groups can be made up

(2) Source: Comité Européen des Assurances, European Insurance in

Figures, 2007. The figures reflect data available by late 2006.

(3) Idem footnote 2.
(4) Idem footnote 2.
(5) Idem footnote 2.
(6) Idem footnote 2.
(7) Idem footnote 2.
(8) Idem footnote 2.

3.7
The current financial crisis, triggered by subprime mort-
gage lending practices in the USA, underlines the case for sound
and thorough solvency standards, enabling insurance companies
to meet their commitments even under duress. Rules, manage-
ment methods and stress tests contribute to reaching this goal.

4. Legislative approach

In line with its Better Regulation agenda, the Commis-
4.1
sion has been preparing the Solvency II directive at length and
in depth while taking into account the rules covering the recast
parts of the work. Several waves of qualitative and quantitative
impact assessments and consultations have ensured that many
concerns of both the industry and the supervisory authorities
have been taken into account. New waves of detailed scrutiny
and consultation are coming up.

The Commission's proposal

4.2
is a so called ‘Lamfalussy’
Directive, based on the four level structure of the Lamfalussy
financial services architecture. The Level 1 provisions of the
Directive are principle-based, providing the basis for adoption of
implementing measures at Level 2 and with instructions for
supervisory convergence at Level 3 of
the process. This
approach is intended to enable the new regime to be promptly
adapted to reflect changes in the market, international develop-
ments in accounting and (re)insurance regulation, technological
developments, emerging experiences and new methodologies.
Setting detailed calculation specifications in the Directive's arti-
cles would jeopardise the very sense of this innovating legislative
process. Levels 2 and 3 are more adequate to deal with them.

4.3
The new regime is structured in the form of three pillars,
similar to Basel II capital requirements of the banking sector,
but reflecting the specificities of
insurance business. Pillar I
(Articles 74-142) is defining quantitative financial requirements,
Pillar II (Articles 27-34, 36-38, 40-49, 181-183) is dealing with
the supervisory review process and qualitative requirements and
Pillar III (Articles 35, 50-55) is regulating supervisory reporting
and public disclosure. The three Pillars do not stand alone, but
complement each other
the
regime.
in different pillars
should be duly considered.

Interactions between provisions

in pursuing the objectives of

(9) Idem footnote 2.
(10) Source AISAM.

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4.4
The revision of the present solvency regime has also
been used as an opportunity to recast 13 (re)insurance Direc-
tives into one single simplified directive in which the new
solvency rules have been integrated. It contains a number of
amendments of a non-substantive nature in order to improve
the proposed Directive's drafting. Articles, or parts of articles,
which have become obsolete have been deleted.

5.5
In essence, the new system will firstly provide supervisors
and insurers with sophisticated solvency tools, not only in order
to withstand adverse events with regard to insurance risks, such
as floods, storms or big car accidents, but for market risk, credit
risk and operational risks as well. Contrary to the present legis-
lation, insurers and reinsurers will be required to hold capital in
proportion to their overall solvency risk, taking into account
not only quantitative elements, but also qualitative aspects that
influence the risk-standing of the undertaking.

5. General aspects

Over the last 30 years, successive generations of EU
5.1
Directives have
created a European (re)insurance market
governed by a common set of rules, among which the principles
of mutual recognition and home country control. They have
created a market open to non-EU operators and encouraged EU
insurers to expand into non-EU markets, mostly in North
America, Asia and in countries that may be considered for
future EU membership.

5.2
The proposed leading edge solvency regulation ensures
that insurers are financially sound and capable of withstanding
adverse events in order to deliver on their contractual promises
to policyholders and to guarantee a stable financial system. It is
important however to stress that all consumers of these finan-
cial services deserve such enhanced protection. A number of
market operators are not subject to insurance regulation, such
as occupational pension providers or savings and investment
institutions.

to undertakings with different

5.3
Harmonised solvency rules create trust, not only among
consumers but among supervisors as well. Such trust is a deter-
mining feature in order to make a European market with
mutual recognition and home country control work in practice.
The current EU solvency rules (Solvency I) are outdated though.
They are not sensitive to the specific risks born by the entity
that provides the insurance coverage, therefore leading to equal
solvency requirements
risk
profiles. Moreover, current Solvency rules are mainly focused on
financial compliance, following a rules-based approach rather
than on good management and they do not properly deal with
group supervision. In addition, the current EU legislative frame-
work still leaves too much scope to Member States for national
variations, thereby compromising the efficiency of supervision
of multinational operations and the level playing field. In the
light of these shortcomings, the present regime has been super-
seded by industry, international and cross-sector developments.
The new Solvency standards defined by the Directive proposal
in other words a trend already established by risk-
reflect
conscious operators and supervisors from different countries.

In contrast to the Solvency I

the reform
5.4
concentrates on the actual quality of risk management in the
undertaking and on principles and objectives rather than rules
that do not take into account specific risk profiles of compa-
nies.

framework,

It also aims to align supervision practice across the EEA.

It

5.6
is based on an economic risk sensitive approach,
which aims to ensure that the true underlying exposures of risks
and risk mitigation schemes are properly reflected, thereby elim-
inating regulatory arbitrage opportunities that can distort and
weaken the protection available to policyholder. This also means
that the capital requirements should allow for an optimal alloca-
tion of capital and give incentives to a better internal risk
management.

5.7
Secondly, Solvency II emphasizes the responsibility of the
management of the insurers in ensuring sound risk management
and strives to enhance good practice in the industry. They will
be required to focus on the active identification, measurement
and management of risks and to consider any future develop-
ments, such as new business plans or the possibility of cata-
strophic events that may affect their financial standing. Further-
more, the proposed reform will require them to assess their
capital needs in light of all risks by means of the ‘Own Risk and
Solvency Assessment’ (ORSA), whilst the ‘Supervisory Review
Process’ (SRP) will shift the focus of supervisors from legalistic
compliance and capital monitoring to evaluating the actual
insurers' risk profiles and the quality of their risk management
and governance systems through for example early warning
mechanisms and stress tests. In parallel, it encourages supervi-
sory cooperation and convergence, for instance by enhancing
the role of CEIOPS (Committee of European insurance and
occupational pensions supervisors), as a step towards more
unity in the supervision of financial services, which the EESC
supports.

5.8
A third important aspect is trying to improve the effi-
ciency of insurance groups supervision, through a ‘group super-
visor’ in the home country. Group supervision will ensure that
group-wide risks are not overlooked and enable groups to
operate more efficiently at the same time, whilst providing all
policyholders with a high level of protection. The group super-
visor will have specific responsibilities to be exercised in close
co-operation with the relevant national supervisors, while also
having the responsibility to find decisions on a limited number
of issues. Local supervisors are encouraged to take an active
part in the college of supervisors, as they have a right of co-
decision as long as an agreement can be achieved. It entails a
different approach that must be used in order to be able to
recognise the economic realities and risk diversification potential
of such groups.

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5.9
Fourth, the Solvency II Directive introduces more trans-
parency and objectivity, both in terms of information provided
by the undertaking on its financial condition and on the asso-
ciated risks and in terms of supervisory review processes. At
present, supervisory practices still tend to vary between Member
States, leaving room for regulatory arbitrage. Both for European
policy in these matters and for insurers actually wanting to
accede a new national market, it seems important that supervi-
sory practices would not only be objective and transparent, but
also predictable and well documented.

default over a certain time horizon (0.5 % over one year
horizon).

6.1.5
The MCR reflects indeed a level of capital which will
trigger ultimate supervisory actions when needed. The MCR
calculation should allow for a sufficient range as compared to
the SCR, to ensure sufficient room for a reasonable ladder of
intervention by the supervisory authorities.

6. In depth analysis

6.1 Financial requirements (Pillar I)

(Ar ticles 74-142)

In defining the quantitative requirements for insurance
6.1.1
undertakings, the new regime takes a holistic ‘total balance
sheet approach’, under which all the assets (11) and liabilities are
measured according to a market consistent approach and all
quantifiable risks associated to them are reflected explicitly in
terms of capital requirements. Valuation of assets and liabilities
at levels matching their trading conditions ensures they are
valued objectively and consistent between each other. It also
ensures that a correct value is placed for any optionality
inherent to them. The realistic forward looking valuation is the
most effective protection against a possible bias that could
imperil all stakeholders' rights.

6.1.2
In this valuation context, particular relevance is allo-
cated to the calculation of technical provisions, i.e. the liabilities
towards policyholders and other beneficiaries. Market consistent
valuation of technical provisions is achieved through the calcula-
tion of the ‘best estimate’, which is the probability weighted
average of future cash flows taking into account the time value
the money, and including a risk margin. This approach
of
should ensure that the overall value of technical provisions is
equivalent to the amount that a third-party would be expected
to require in order to take over the insurance portfolio and
meet the related obligations. The calculation must use and be
consistent with information provided by the financial markets
and generally available data on insurance risks.

As to the capital

the new solvency
6.1.3
system contains two capital requirements, the Solvency Capital
Requirement
(SCR) and the Minimum Capital Requirement
(MCR), with different purposes and calculated accordingly.

requirements,

6.1.4
The SCR defines a target level of capital that an insurer
should meet under normal operating conditions, beneath which
supervisory interventions will intensify. It allows for progressive
supervisory intervention before the capital reaches the MCR and
thereby gives reasonable assurance to policyholder and benefici-
aries that obligations will be met as an insurer falls due. Techni-
cally, the SCR intends to be designed and calibrated in order to
define a level of capital that enables an undertaking to absorb
significant unforeseen losses, based on a certain probability of

6.1.6
In practice, an insurer may calculate the SCR either by
using a standard formula or by using its own internal model
that has been approved by the supervisory authorities. The
standard formula is to reflect appropriately risk mitigation tech-
niques and diversification effects as well as any form of loss
absorption capability of balance sheet elements which are not
included in the available capital. The risk oriented approach of
the proposed directive implies that an internal model
(either
partial of full) can replace — under supervisory validation —
the standard calculation, provided that
it better reflects the
undertaking's risk profile. This is an important incentive to a
sound internal recognition and management of risks, as well as
to the training and hiring of highly qualified staff.

Another element which is in line with the aim to
6.1.7
encourage good internal management is the application of the
to the investment policy, which
‘prudent person principle’
would allow not to set artificial
limits to investments, while
requiring high qualitative standards and duly accounting for any
material risk in the calculation of the capital charge.

6.1.8
Considering the complexity of the requirements, it is
important to note that the current proposal includes provisions
to allow for a proportionate and manageable implementation of
Pillar I requirements. This is particularly important for small and
medium-sized insurance undertakings (SMEs). This proportion-
ality principle makes reference not to the scale, however, but to
the nature and complexity of the risks faced by undertakings.
SMEs are subject to similar general prudential principles as far
as their risk profile is the same as of other undertakings. Their
customers and beneficiaries benefit from the same protection
level.

6.2 Supervisory review process and qualitative requirements (Pillar II)

(Ar ticles 27-34, 36-38, 40-49, 181-183)

Solvency

The Commission's

6.2.1
II proposal defines
supervisory activities and reviews,
processes and tools for
including the definition of supervisory powers, provisions for
cooperation between national supervisors as well as for supervi-
sory convergence. The Pillar II provisions also address qualitative
requirements on undertakings, i.e. their system of governance,
including an effective internal control system, risk management
system, actuarial function,
internal audit, compliance function
and rules on outsourcing.

(11) Assets held by EU insurance companies are mainly bonds (37 %),
shares (31 %) and loans (15 %). Source: Comité européen des assur-
ances, European Insurance in figures, 2007.

6.2.2
Supervisory tools aim to identify institutions with
financial, organization or other features susceptible to producing
a higher risk profile, which in exceptional circumstances could

30.8.2008

EN

Official Journal of the European Union

C 224/17

be asked to hold a higher solvency capital than under the SCR
and/or to take measures to reduce the risks incurred.

vision of groups, by changing the way — under a set of condi-
tions — in which solo and group supervision are carried out.

The aforementioned proportionality principle applies
6.2.3
to the supervisory review process as well. Supervisors must
implement their powers taking into account the scale, nature
and complexity of the risks of the individual undertaking in
order to avoid a supervisory overload particularly for those
small and medium sized insurance companies which are
exposed to a low level of risk.

Solvency II

6.2.4
is designed to enhance the qualitative
assessment carried out by supervisors on the risk situation of
the undertaking. It is important that supervisors are consistent
in their actions and decisions across different countries, different
undertakings and over time. It is worth repeating the impor-
tance of transparency, objectivity and predictability of supervi-
sory actions. This is particularly relevant in the case of the
approval of internal models.

6.3 Supervisory reporting and public disclosure (Pillar III)

(Ar ticles 35, 50-55)

6.3.1
Transparency and disclosure to the public (public
disclosure) of information by undertakings about their financial
conditions and risks serve to reinforce market discipline.
In
addition,
insurance undertakings should provide supervisors
(supervisory reporting) with the quantitative and qualitative
information they need to perform effective
and
guidance.

control

6.3.2
The harmonization of public disclosure and supervi-
sory reporting is an important part of the new regime, as there
is a clear need for convergence in order to deliver a comparable
format and content across Europe. This is of particular impor-
tance with regard to multinational groups.

6.4 Group supervision

(Ar ticles 210-268)

6.4.1
The current EU legislation considers group supervision
as merely supplementary to solo supervision. Supervision at
solo level does not consider whether a legal entity is part of a
group (e.g. a subsidiary) or not. Subsequently, group supervision
is simply added on top of solo supervision with the only
purpose to assess the implication of groups relationships on the
single undertaking. As a result, the current EU solvency regime
does not recognise the economic reality of insurance groups
and neglects the fact that in many cases risk management is
conducted at group level rather than at solo level. The Solvency
II proposal seeks to find a more appropriate way for the super-

Brussels, 29 May 2008.

For each insurance group, a single authority will be
6.4.2
appointed as ‘group supervisor’ and is given primary responsi-
bility for all key aspects of group supervision (group solvency,
intragroup transactions, risk concentration, risk management
and internal control). However, the group supervisor and solo
supervisor are required to exchange essential information auto-
matically and other relevant information on request. Moreover,
the group supervisor is required to consult the relevant solo
supervisory authorities prior to important decision and the
supervisory authorities concerned are required to do everything
within their power to reach a joint decision, though in the case
of approval of group internal model, as in the case of banking
regulation, the final decision will be taken by the group super-
visor. These provisions should ensure that both the group and
the risk
solo supervisors will get a better understanding of
profile of the whole group and, as a consequence, that policy-
holders of each entity of the group are given increased protec-
tion.

the proposal

In addition to the improved concept of group supervi-
6.4.3
sion,
introduces an innovative group support
regime. Groups that would like to facilitate their capital manage-
ment at group level can apply for permission to be regulated
under the group support regime. Groups that are granted with
the permission to be regulated under the group support regime
will be allowed — under a clear number of conditions — to
meet a part of the SCR (not the MCR) of the subsidiaries by a
declaration of group support (a financial,
legally enforceable
commitment of the parent to a subsidiary to provide capital
when necessary). In order to allow the group support regime to
operate efficiently, a few additional derogations to solo supervi-
sion are included. When group support regime is in place, a
specific procedure is envisaged in the case of stress conditions
(breach of the solo SCR), which entails coordinated actions of
the solo and group supervisors. This regime should be applied
in a uniform way across the Union.

6.4.4
Because the group support regime allows for the SCR
capital of subsidiaries to be held somewhere else within the
group, it provides insurance groups with a practical and trans-
parent measure to benefit from the recognition of group diversi-
fication effects while the individual subsidiaries meet the same
level of capital requirements as if they were not part of a group.
For these reasons, appropriate supervision should be put in
place in order to ensure the prompt transferability of the capital
when it is needed. The existence and use of declarations of
group support shall be publicly disclosed by both the parent
undertaking and the subsidiary concerned.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS