EC Report on Application of Solvency II Regarding Group Supervision
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
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Cassandra Hannibal
Life insurance actuary; risk management and economic capital specialist
Jerome Ogrodzki
Insurance asset and liabilities modeling specialist; stochastic modeling expert
Previous Article
Dubai FSA Updates Several Modules of Its RulebookRelated Articles
FED Revises Capital Planning and Stress Testing Requirements for Banks
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
MAS Revises Guidelines on Technology Risk Management
MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
