Explanatory Memorandum to COM(2021)581 - Amendment of various elements of Directive 2009/138/EC (Solvency II) including proportionality, reporting, tools, guarantees, risks and supervision - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)581 - Amendment of various elements of Directive 2009/138/EC (Solvency II) including proportionality, reporting, tools, ... |
|---|---|
| source | COM(2021)581  |
| date | 22-09-2021 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The economic and social importance of insurance 1 warrants intervention by public authorities, in the form of prudential supervision. Insurers provide protection against future events that may result in a loss, and channel household savings into the financial markets and the real economy. Directive 2009/138/EC 2 (“Solvency II”) sets out prudential rules for the insurance sector and aims to enable a single market for insurance services, while also protecting policyholders.
The European Commission has a legal mandate to conduct a comprehensive review of pivotal components of the Solvency II Directive, in particular its risk-based capital requirements and rules on valuation of long-term liabilities, and to draw conclusions from the first 5 years of experience with the framework. This experience has also shown that the proportionality of Solvency II could be improved, and has underlined the absence of specific EU-level provisions to address the build-up of systemic risks, to ensure preparedness for crises or to resolve insurers, where necessary.
Moreover, the framework needs to be consistent with the EU’s political priorities. In particular, the insurance sector should play a role in financing the post COVID-19 economic recovery, in completing the Capital Markets Union (CMU) 3 and in achieving the targets of the European Green Deal 4 . More specifically, the sector will be instrumental to “re-equitisation” in the corporate sector and financing the transition to sustainability.
Other European institutions also regard the review as a pivotal initiative to support the objectives of the CMU. The European Parliament’s report on further development of the CMU 5 requests the Commission to assess whether capital requirements for investments in businesses, notably small and medium-sized enterprises (SMEs), discourage long-term investments. The Council Conclusions 6 on the CMU Action Plan invite the Commission to strengthen the role of insurers as long-term investors and assess ways to incentivise long-term investments in businesses, particularly SMEs, without endangering financial stability or investor protection.
Against this background, the Commission identified the following objectives for the review:
·provide incentives for insurers to contribute to the long-term sustainable financing of the economy;
·improve risk-sensitivity;
·mitigate excessive short-term volatility in insurers’ solvency positions;
·enhance quality, consistency and coordination of insurance supervision across the EU, and improve protection of policyholders and beneficiaries, including when their insurer fails;
·better address the potential build-up of systemic risk in the insurance sector.
• Consistency with existing policy provisions in the policy area
This proposal builds on and strengthens the prudential framework for insurance companies set out in Directive 2009/138/EC, as explained in more detail in section 5 below. The Solvency II Directive represents, alongside Delegated Regulation (EU) 2015/35 7 , the cornerstone of the EU prudential framework for insurance. A Communication 8 adopted together with this proposal explains in more detail the interaction between the proposal and forthcoming amendments to Delegated Regulation (EU) 2015/35.
• Consistency with other Union policies
This proposal is adopted as part of one package, together with a legislative proposal on resolution for insurance undertakings; this package aims to enhance the functioning of and trust in the single market for insurance. The proposals in the package tie into each other, as the proposal amends the rules on supervision before an insurance company fails, while the new standardising rules on resolution address the procedures and powers following such a failure.
Through amendments to the rules on valuation of insurers’ liabilities, this proposal helps to complete the CMU. In particular, the relevant amendments make undue pro-cyclical behaviour less likely and reflect better the long-term nature of the insurance business. These changes will be accompanied by additional measures under Delegated Regulation (EU) 2015/35, to ensure the appropriateness of the risk margin calculation and of the eligibility criteria for the long-term equity asset class.
At this stage, the Commission is pursuing several initiatives to increase private financing of the transition to a carbon-neutral economy and to ensure that climate and environmental risks are managed by the financial system. To this end, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive 9 clarifying non-financial reporting requirements for sustainability and extending the scope, among other things, to medium-sized insurance undertakings. To avoid duplication, this proposal does not address sustainability-related disclosure requirements.
By introducing a requirement to conduct climate change scenario analysis, the proposal contributes to the strategy for financing the transition to a sustainable economy 10 , which aims to strengthen the foundations for sustainable investments, to fully integrate sustainability considerations into the financial system and to manage these.
The Commission will also take due care of the need to avoid inconsistency between this proposal and upcoming amendments to rules for the banking sector.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The Solvency II Directive provides for a comprehensive regulatory framework on the taking-up and pursuit of insurance business within the EU. The legal bases of the current Directive are Articles 53(1) and 62 of the Treaty on the Functioning of the European Union; Union action in accordance with these Articles is needed to continue aligning the current rules or to introduce new standardised rules.
• Subsidiarity
According to the principle of subsidiarity, Union action may only be taken if the envisaged aims cannot be achieved by Member States alone. Regulation of insurance at European level is long established, because only Union action can set a common regulatory framework for insurers that benefit from freedom of establishment and freedom to provide services. In this regard, this proposal, like the legislation it seeks to amend, is in full compliance with the principle of subsidiarity.
• Proportionality
This proposal aims to amend certain provisions of the Solvency II Directive, in particular those on capital requirements, on valuation of insurance liabilities towards policyholders and on cross-border supervision. It also introduces necessary clarifications and changes to provisions implementing the principle of proportionality. These changes are necessary and proportionate to improve the functioning of the regulatory framework for insurers and to attain the objectives of Solvency II.
• Choice of the instrument
This proposal aims to amend the existing Solvency II Directive, and therefore the instrument chosen is an amending Directive.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The annex to the accompanying impact assessment contains an evaluation of the Solvency II framework. The principal conclusions are that the framework is broadly effective and coherent, continues to address needs and problems, and brings the intended added value. Nonetheless, it also highlights a number of issues in implementing its principles and requirements, and with the supervisory convergence process. Furthermore, the framework does not fully take into account the new financial and economic environment, particularly as regards low interest rates.
In addition, there is still excessive short-term volatility, despite existing tools aiming to mitigate such effects. Capital requirements need improving to ensure risk-sensitivity and appropriate treatment of long-term investments. Furthermore, they do not take into account the sustainable nature of the assets held by insurers. Some characteristics of the reporting and disclosure provisions could be improved and, more generally, the implementation of proportionality has been insufficient to effectively reduce the regulatory burden for smaller insurers.
The evaluation also points to regulatory and supervisory shortcomings in policyholder protection. There are opportunities to further align supervisory processes and improve cooperation between supervisors in the case of cross-border activities. Moreover, supervisory authorities have only limited tools to address the potential build-up of systemic risk in the insurance sector and undertake appropriate macro-prudential supervision.
• Stakeholder consultations
The Commission carried out various consultation activities for this review. On 29 January 2020, it held a public conference on the review, with representatives from the insurance industry, insurance associations, public authorities, civil society and the European Parliament.
The Commission also ran a public consultation from 1 July 2020 to 21 October 2020, receiving 73 responses from a variety of stakeholders representing the insurance industry (56%), civil society (14%) and public authorities (11%). The Commission published a summary report on the feedback to this consultation on 1 February 2021 11 . In addition, the Commission discussed various aspects of the review during several meetings of a group of Member State experts.
These consultation activities complement three consultations run by EIOPA between July 2019 and January 2020.
• Collection and use of expertise
Following a formal request for advice 12 sent by the Commission in February 2019, EIOPA provided an Opinion 13 on the Solvency II review, along with a background analysis and an impact assessment, on 17 December 2020. EIOPA’s Opinions informed the Commission’s impact assessment and the development of this proposal. Annex 10 of the accompanying impact assessment lists additional sources considered when preparing this proposal.
• Impact assessment
This proposal is accompanied by an impact assessment 14 . The impact assessment was submitted to the Regulatory Scrutiny Board (RSB) on 19 March 2021, and received a positive opinion on 23 April 2021 15 . While the RSB commended the comprehensive and well-structured nature of the impact assessment, it recommended further developing the problem analysis and narrative, including in relation to proportionality. The impact assessment has been amended accordingly.
The impact assessment identifies a set of preferred policy options that address five main problems:
i) disincentives for long-term investments in equity and inadequate reflection of sustainability risks;
ii) inadequate reflection of the low interest rates environment and, possibly, unduly high volatility in solvency positions;
iii) complexity for small and less risky insurers;
iv) recent failures of insurers operating across borders, which highlighted supervisory shortcomings and varying protection of policyholders across the EU following these failures;
v) tools to prevent systemic risks may prove to be insufficient.
The main trade-off in addressing these problems relates to the overall quantitative impact of the review. A significant increase in capital requirements would hinder insurers’ contribution to the green and sustainable recovery. At the same time, a significant decrease would jeopardise policyholder protection and financial stability.
In fact, due to a phasing in of the changes on interest rates, the preferred policy options would result in significant capital relief, estimated at up to EUR 90 000 000 000 in the short term. At the end of the transitional period, the preferred policy options are estimated to result, compared with the current situation, in more or less stable or slightly increased capital in excess of regulatory requirements (depending on market conditions).
• Regulatory fitness and simplification
The proposed Directive improves regulatory fitness and simplifies the framework as follows:
·excluding more small firms from Solvency II;
·making more proportionate rules available automatically to “low-risk profile undertakings” and, after supervisory approval, to other insurers;
·simplifying the quantification of immaterial risks;
·ensuring that required disclosures do not go beyond what is necessary for the recipients.
As regards digital readiness, the provisions of the Solvency II Directive are already technology-neutral. In addition, existing empowerments for the Commission and EIOPA would allow further adjustments, notably on supervisory reporting and disclosures.
• Fundamental rights
The proposal respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the European Union, in particular the freedom to conduct a business (Article 16) and consumer protection (Article 38).
4. BUDGETARY IMPLICATIONS
The proposal has no budgetary implications.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will monitor the progress towards achieving the specific objectives based on the non-exhaustive list of indicators in Section 8 of the accompanying impact assessment.
In five years, the Commission will carry out the next evaluation of the Solvency II Directive, including the amendments of this proposal, in line with the Commission’s Better Regulation Guidelines.
This proposal does not require an implementation plan.
• Explanatory documents
No explanatory documents are considered necessary.
• Detailed explanation of the specific provisions of the proposal
Article 1 of the proposal amends Directive 2009/138/EC.
Contents
- Proportionality
- Quality of supervision
- Reporting
- Long-term guarantee measures
- Macro-prudential tools
- Amendments related to the European Green Deal
- Group supervision
- Supervision of cross-border insurance business
- The amendment to Article 153 ensures timely access to information by a supervisory authority of a host Member State.
- Transitional measures introduced by Directive 2014/51/EU
- Minor updates and fixes
Paragraph 2 amends Article 4 to increase the size thresholds for the exclusions from the scope of Directive 2009/138/EC, allowing thus more small undertakings to be excluded.
Paragraph 12 clarifies in Article 29 the applicability of the proportionality principle with respect to delegated and implementing acts, in particular by introducing the new concept of low-risk profile undertakings.
Paragraph 13 introduces the new Articles 29a to 29e. Article 29a establishes criteria for the identification of low-risk profile undertakings, which can be supplemented in delegated acts. Article 29b establishes the process for the classification as low-risk profile undertakings.
Article 29c lists the proportionality measures available “automatically” to low-risk profile undertakings and establishes the rules in case of change of the risk profile. Article 29d sets out how undertakings not classified as low risk profile can be authorised to use proportionality measures. Article 29e sets out reporting obligations for the low-risk profile undertakings.
Paragraph 63 introduces the new Article 213a, which establishes the criteria for the identification of low-risk profile groups, as well as the rules on the use of proportionality measures by these insurance groups.
Paragraph 21 introduces a new paragraph 2a in Article 41 to allow low-risk profile undertakings to assign one person to hold several key functions. The paragraph also provides proportionality measures in relation to governance rules; in case of low-risk profile undertakings the internal policies listed in Article 41(3) need to be updated only every three years instead of annually.
Article 45 is amended to allow low-risk profile undertakings, captive insurance undertakings and captive reinsurance undertakings meeting certain criteria l to carry out the own risk and solvency assessment every two years instead of at least annually.
Changes to Article 77 would allow the use of prudent deterministic valuation of the best estimate for life obligations with options and guarantees not deemed material instead of the use of stochastic valuation techniques.
The new Article 109 introduces simplifications in the standard formula when a risk module or submodule is not material, provided that some specific criteria are met.
The amendment to Article 25 ensures that each refusal of an authorisation, including the reason, shall be notified to EIOPA and recorded in a database which can be consulted by supervisory authorities. The change to Article 26 introduces the possibility of joint assessment of an application for authorisation at the request of one of the supervisory authorities that need to be consulted by the supervisory authority of the home Member State.
The amendments to Articles 30, 36 and 42 aim to enhance the monitoring of compliance with fit and proper requirements as regards members of the administrative, management or supervisory body (AMSB) or persons that have other key functions in the insurance or reinsurance undertaking. Article 42 i empowers the supervisory authorities to request the removal of an AMSB member or key function holder.
The modifications to Article 35 and the new Article 35a adapt the reporting requirements for low-risk profile undertakings, notably to facilitate the access to exemptions and limitations on reporting for these entities.
The new to Article 35(5a) and the new Article 256b on the Regular Supervisory Report (RSR) by undertakings and groups lay down the principles and frequency for this narrative report. The new Article 35b sets out reporting deadlines and introduces the possibility to change them where justified by extraordinary circumstances.
Paragraphs 26 and 83 amend Article 51 and, respectively, Article 256 to modify the structure of the Solvency and Financial Condition Report (SFCR) by undertakings and groups, splitting its content into a part addressed to policyholders and a part addressed to other stakeholders.
Paragraphs 27 and 84 introduce through the new Articles 51a and 256c an auditing requirement for the prudential balance sheet, the group balance sheet and/or the single SFCR.
Paragraph 28 introduces in Article 52 the obligation for supervisors to submit to EIOPA statistics on the use of proportionality measures and simplifications in their market.
Paragraph 47 amends Article 112 to require undertakings using an internal model to report regularly to the supervisors an estimation of the Solvency Capital Requirement calculated with the standard formula.
Paragraph 37 replaces Article 77a on the rules for the extrapolation of the relevant risk-free interest rate term structure. The amendments require that the extrapolation takes into account, where available, information from financial markets for maturities where the term structure is extrapolated. The resulting new extrapolation method is phased in linearly over a period running until 2032, during which insurers will have to disclose the impact of the new extrapolation method without phasing in.
Paragraph 38 amends Article 77d concerning the volatility adjustment. New cases of using the volatility adjustment will become subject to supervisory authorisation. Furthermore, a higher percentage of 85% of the risk-adjusted spread is taken into account in the volatility adjustment. To mitigate the risk that the volatility adjustment compensates beyond the losses on investments from an increase in credit spreads, an undertaking-specific ‘credit-spread sensitivity ratio’ is introduced. Finally, the country component of the volatility adjustment is replaced with a macro volatility adjustment for Member States whose currency is the euro in order to mitigate the impact of spread crises at country level while avoiding cliff edge effects.
These changes are complemented by paragraph 48, which introduces in Article 122 safeguards where an internal model takes into account the effect of credit spread movements on the volatility adjustment (“dynamic volatility adjustment”).
Paragraph 44 amends Article 106(3) to allow the symmetric adjustment to the equity risk to increase or decrease capital charges by a maximum of 17%, instead of 10%.
Paragraph 51 amends Article 138 to ensure that EIOPA, instead of national supervisory authorities, consults the ESRB before declaring an exceptional adverse situation.
Paragraph 90 replaces Article 304(2) on the duration-based equity risk sub-module, the use of which should no longer be approved, with a grandfathering provision.
Paragraphs 95 and 96 amend Article 308c on the transitional measure on the risk-free interest rates and, respectively, Article 308d on the transitional measure on technical provisions. New approvals of the use of those transitional measures are restricted to a closed list of circumstances. Furthermore, companies using those measures will have to disclose the reasons for the use as well as an assessment of and measurers to reduce the dependency on the measures.
Paragraphs 39, 40 and 46 align Article 77e, Article 86 and, respectively, Article 111 on the empowerments for delegated and implementing acts with the changes described above. In addition, paragraph 40 introduces a new empowerment for delegated acts on asset eligibility criteria in the context of the matching adjustment.
Paragraph 24 integrates macroeconomic considerations and analysis in Article 45 on the Own Risk and Solvency Assessment by insurers. Insurers will be required to assess the impact of plausible macroeconomic and financial market developments, including adverse economic scenarios, on their specific risk profile, business decisions and solvency needs, and reciprocally how their activities may affect market drivers. Supervisory authorities will be required to provide input to specific undertakings, particularly as regards macroprudential risks and concerns arising from their analysis.
Paragraph 49 integrates macroeconomic considerations in Article 132 on the prudent person principle for investments. Insurers will be required to factor plausible macroeconomic and financial markets’ developments into their investment strategy and assess the extent to which their investments may increase systemic risk. Supervisory authorities will be required to provide input to specific undertakings as regards particular macroprudential concerns.
Paragraph 54 introduces the new Articles 144a to 144d. Article 144a introduces requirements on liquidity management and planning to ensure the ability to settle financial obligations towards policyholders. Notably, insurers will have to develop liquidity risk indicators to monitor liquidity risk.
Article 144b enables supervisory authorities to intervene where liquidity vulnerabilities are not appropriately addressed by an insurer. In addition, supervisory authorities will have the possibility, in exceptional situations and as a last resort measure, to impose on individual companies or the entire market temporary freezes on redemption options on life insurance policies.
Article 144c introduces supervisory powers aiming to preserve the solvency position of specific undertakings during exceptional situations such as adverse economic or market events affecting large part or the whole insurance market. Subject to risk-based criteria and specific safeguards, distributions to shareholders and other subordinated lenders of a given undertaking can be suspended or restricted before an actual breach of the Solvency Capital Requirement.
Paragraph 25 introduces the new Article 45a on climate scenario analysis. Insurers will have to identify any material exposure to climate change risks and, where relevant, to assess the impact of long-term climate change scenarios on their business. Insurers classified as low-risk profile undertakings are exempted from scenario analyses.
Paragraph 91 introduces the new Article 304a with two mandates to EIOPA as regards sustainability risks. EIOPA is mandated to explore by 2023 a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives and to review regularly the scope and the calibration of parameters of the standard formula pertaining to natural catastrophe risk.
Article 212 of the Solvency II Directive is amended to facilitate the identification of undertakings which form a group, in particular with respect to groups which are not in the scope of Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, and to horizontal groups. In addition, the definition of insurance holding company is clarified in a similar manner as the amendments to the definition of financial holding company in Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
Article 213 is amended in order to bring insurance holding companies and mixed financial holding companies directly in the scope of the EU prudential framework. The new paragraph 3a requires appropriate internal governance and corporate structure for groups whose parent undertaking is a holding company, to allow for effective group supervision. Paragraphs 3b and 3c are inserted to ensure appropriate enforcement powers, including, as a last resort measure, the power to require the group to restructure.
Paragraph 64 amends Article 214 to clarify when an undertaking can be excluded from the scope of group supervision, when group supervision can be waived or can be exercised at the level of an intermediate parent undertaking.
Articles 244, 245 and 265 are amended in order to extend the list of indicators based on which a group supervisors may define significant intragroup transactions and risk concentrations and to clarify the scope of reporting of intragroup transactions.
Paragraph 86 introduces in Article 258 a minimum set of powers that may be applied to insurance holding companies and mixed financial holding companies.
Paragraph 87 amends Article 262 by clarifying the objectives and necessary powers where “other methods” are applied for the supervision of groups whose ultimate parent undertakings have their head office outside the EEA.
A new Article 229a is inserted in order to grant the possibility, subject to supervisory approval, to use a simplified approach to the integration of non-material related undertakings in the group solvency calculation. Materiality thresholds are introduced.
Articles 220, 222, 228, 230, 233, 234 and 308b(17) are amended and a new article 233a is inserted in order to provide the following clarifications on rules governing group solvency calculation:
·the type of undertakings that may be included through method 2;
·how the consolidated group Solvency Capital Requirement should be calculated in the case of a combination of methods;
·how to include undertakings from other financial sectors, e.g. credit institutions, in the group solvency calculation;
·how to assess group own funds, notably the concept of “clear of encumbrances”, the treatment of transitional measures on technical provisions and on the risk-free rate, and the treatment of own-funds items that cannot effectively be made available to cover the Solvency Capital Requirement;
·in the case of a use of method 1 or a combination of methods, how to calculate the floor to the consolidated group Solvency Capital Requirement.
Furthermore, a revised “Minimum Consolidated Group Solvency Capital Requirement” is introduced mirroring the rules on the Minimum Capital Requirement at individual level.
Articles 246 and 257 are amended in order to clarify the application mutatis mutandis at group level of governance rules applicable to individual undertakings. Those amendments include the role of the administrative, management or supervisory body of the parent undertaking and require that groups ensure consistency of the group written policies with those adopted by related undertakings. Finally, they clarify that the persons in charge of other key functions within insurance holding companies and mixed financial holding companies should be fit and proper.
In addition, Articles 246a and 246b are inserted in order to specify how the new macroprudential rules apply at the level of insurance groups.
The provisions on authorisation in Article 18 are amended by a requirement on applicants to provide information on previous rejections or withdrawals of authorisation in other Member States and on supervisory authorities to take that into account in the assessment of applications. In the context of the authorisation process, changes to Article 23 ensure that supervisory authorities will also be informed about intended cross-border business.
Paragraph 15 introduces in Article 33a minimum requirements regarding the exchange of information between the supervisory authorities in home and host Member States concerning the insurers and their activities in the host Member State.
Amendments to Articles 149 and 152 clarify that insurance undertakings should notify material changes and emerging risks related to ongoing cross-border insurance activities. Supervisory authorities should exchange such information.
Paragraph 58 of Article 152b enhances the role of EIOPA in complex cross-border cases where the supervisory authorities involved fail to reach a common view in a cooperation platform.
The amendment to Article 153 ensures timely access to information by a supervisory authority of a host Member State.
Article 159a empowers the supervisory authority of the host Member State to request from the supervisory authority of the home Member State information on the solvency position of the undertaking and, in case of strong concerns, to request carrying out a joint onsite inspection. EIOPA is given a role in resolving disagreements between supervisory authorities.
Paragraph 94(b) replaces an expired transitional measure in the context of exposures to Member States' central governments or central banks denominated and funded in the domestic currency of another Member State. Under a new grandfathering provision, exposures of this type incurred before 2020 can benefit from the same treatment as exposures to Member States' central governments or central banks denominated and funded in their own domestic currency. The new grandfathering provision is, unlike the previous transitional measure, not set to expire.
Several paragraphs modify Directive 2009/138/EC for minor updates and fixes, in particular to align definitions, intra and extra-law references with changes introduced in other paragraphs and to remove obsolete references to the United Kingdom.