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
Previous ArticleDubai FSA Updates Several Modules of Its Rulebook
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
ISDA launched the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol, with both becoming effective on January 25, 2021.
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).
US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).