EC published report on the application of Solvency II Directive (2009/138/EC) on the taking and pursuit of the business of insurance and reinsurance with regard to group supervision and capital management within a group of insurance or reinsurance undertakings. This report identifies issues and assesses the benefit of enhancing group supervision and capital management within a group of insurance or reinsurance undertakings, as required under Article 242(2) of the Solvency II Directive. EC has invited EIOPA to provide, by June 30, 2020, technical advice on the issues identified in this report as well as other related issues that may be detrimental to policyholder protection, as part of the 2020 review of the Solvency II Directive. Unless stated otherwise, the report uses data up to the end of 2017, covering the 28 member states of EU.
Overall, the prudential framework of group supervision is proving to be robust, laying emphasis on capital management and governance and allowing for a better understanding and monitoring of risks at the group level. However, some areas of the framework may not ensure a harmonized implementation of rules by groups and national supervisory authorities, with potential impact on the level playing field and on capital management strategies. The report highlights that the diverging implementations of Solvency II on group supervision may be detrimental to policyholder protection, depending on how national supervisory authorities determine the scope of supervision and exercise supervision at the level of parent holding companies. In addition, in light of the wide differences between the supervisory powers of the different national supervisory authorities, it is necessary to assess the appropriateness of the powers of early intervention embedded in Solvency II.
The report identifies a number of legal uncertainties and diverging supervisory practices that can have a significant impact on group solvency. These concern the group own funds, the group Solvency Capital Requirement (SCR), and group Minimum Capital Requirement (MCR). The use of group internal models may raise additional issues. First, a different implementation of the same internal model at solo level and at group level on key aspects such as the dynamic volatility adjustment can affect group risk management. In addition, the use by a group of a partial internal model could generate regulatory arbitrage regarding the way to integrate in the group solvency the entities out of the scope of the model. The report illustrates the wide margin of interpretations regarding the provisions on group governance. With regard to Pillar 3 requirements, the definition and scope of intra-group transactions to be reported is considered by EIOPA and national supervisory authorities as insufficiently clear and exhaustive. However, there are divergent views among supervisors regarding the appropriate level of harmonization of the reporting of intra-group transactions and risk concentrations as well as of the quantification of diversification effects.
The report also provides a brief overview of developments in the fields of mediation of supervisory disputes and insurance guarantee schemes (IGS), which are not directly related to group supervision. The widely fragmented landscape of the insurance guarantee schemes in Europe can affect policyholder protection. EIOPA is further investigating the need for potential moves toward harmonization of the insurance guarantee schemes, following a discussion paper it published in 2018. The report has identified a number of important issues that may need to be addressed, potentially including via legislative changes. However, further analysis is needed on the impact of those potential changes in the rules. Therefore, EC deems it appropriate to include group supervision in the scope of the general review in 2020 of the Solvency II Directive.
Related Link: Report (PDF)
Keywords: Europe, EU, Insurance, Solvency II, Group Supervision, Reinsurance, Reinsurance, SCR, MCR, Internal Models, Pillar 3, Solvency II Review, Call for Advice, EIOPA, EC
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