A Full Plate – Guy Soussan

Guy Soussan has immersed himself in the often complex and brain taxing business of insurance at the European Union level, but somehow retains a sense of humour and affable manner uncommon among the legal fraternity in this business.

His ready smile and relaxed manner will come in handy over the coming months in particular as a number of big insurance-related matters come to a head.

Mr. Soussan is FERMA’s legal and lobbying adviser and the federation will need some cool-headed advice on how to ensure that insurance buyers’ interests are fully protected and advanced during this busy period.

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“There are so many fields of interest for the insurance and insurance-buyer communities in Brussels at the moment that one has to take care to carry out a real analysis before giving advice or lobbying. The acceleration of insurance issues recently has been truly amazing,” said Mr. Soussan.

The first and biggest matter that currently sits on Mr. Soussan’s substantial regulatory plate is of course Solvency II, Europe’s planned new capital adequacy system for the insurance market.

As reported in the latest issue of Commercial Risk Europe and in some depth in our first issue, Solvency II is not something that only inurance companies need worry about.

Cost To Consumers

The significantly tighter capital rules and tougher disclosure and corporate governance requirements threatened by the current format of the draft rules will cost the insurers a lot of extra money.

This money will have to be recouped from somewhere because investors will not stomach a cut in returns and so it is likely that it will be passed onto the customers.

Further, Solvency II covers captives and, as is explained in the story on page 1, it seems increasingly unlikely that many captives will benefit from the simplified and therefore light-touch treatment that captive owners originally hoped they would, under the principles of proportionality contained in the original Directive.

For Mr. Soussan this means he has a lot to read and think about as this Directive is a many-edged package.

“Solvency II is the big issue which can be looked at and applied in many different ways. It has many different implications whether you are a captive, mutual niche insurance company or other. Everyone has their own concern and perspective,” he said, somewhat wistfully.

For insurance buyers one of the main concerns about Solvency II is the potential for a loss of already limited serious industrial insurance capacity.

This is because CEIOPS, the committee of national insurance supervisors that advises the Commission on this Directive, has decided to strengthen the capital charges following the credit crisis through its advice on so-called Level 2 implementing measures.

Many experts have pointed out that, by strengthening the charges so much and leaving so little room for simplifications in the case of captives, that CEIOPS has overstepped the mark and deviated too far from the original intentions of the Level 1 Framework Directive.

“As a regulatory lawyer, I see problems with the risk of setting Level 2 standards which could deviate from the Level 1 Framework Directive agreed last November. I have seen CEIOPS’ advice that is some way different from the intentions of the Level 1 text. It seems that CEIOPS has been too prescriptive and conservative in its advice on Level 2 implementing measures to the Commission,” said Mr. Soussan.

One example of this deviation is the restriction on the recognition of mitigation techniques, such as reinsurance. When it introduced the Directive, the Commission stated that the use of mitigation techniques should be one of the overriding principles of the Level 1 Directive, explained Mr. Soussan.

Mr. Soussan is helping FERMA work out what needs to be done to try and re-divert Solvency II back to its original intentions and stave off some of the problems spotted.

Karel Van Hulle, Head of the insurance and pensions unit at the Commission, and Peter Skinner, MEP and Rapporteur in the Parliament, both told CRE in January, as CEIOPS published its latest advice, that they are willing to listen to the insurance buyers.

But, CEIOPS appears to be growing in strength, particularly as it will soon transform into a quasi-European regulator with the power to override national supervisors if it believes the Directive is not being properly implemented.

This will make the job of the Commission and Parliament all the more difficult if they listen to the lobbyists and try to water down the proposals, said Mr. Soussan.

“There is a growing debate about how much the Commission is able to challenge the advice given by CEIOPS. While CEIOPS is mindful that the Commission has the sole power to adopt the ultimate level 2 measures, it anticipates limited changes to its initial advice, particularly given CEIOPS’ stronger role as it converts to the new European supervisory authority, the European Insurance and Occupational Pensions Authority (EIOPA),” said Mr. Soussan.

“This is clearly not as it should be, since CEIOPS is supposed to be merely an advisory body. In the next months, the Commission will be again under siege from disgruntled stakeholders who have unsuccessfully challenged CEIOPS’ advice. The Commission will probably hear them but it will have to set priorities in conjunction with the Parliament,” he continued.

Another hot political potato that lies within Solvency II is Equivalence. The European Union has decided that countries outside of the E.U. can apply for equivalence and will be granted the ability to trade in the Union under their home supervisory standards if they are deemed suitably similar to Solvency II.

Clearly, those companies that operate in the E.U. and whose systems are deemed equivalent will enjoy significant cost advantages over those that are based in un-equivalent territories.

World Standard

“Equivalence is being seen as a race by third countries to see whether they will be covered and what the implications are if they are not. Final advice will be provided by CEIOPS in March on the appropriate equivalence assessment criteria in the areas of reinsurance supervision, group solvency calculations and group supervision. There is already a concern that certain indicators suggested by CEIOPS could be overly prescriptive and fall short of recognising the ‘specificities’ of third country regimes,” explained Mr. Soussan.

Mr. Soussan said that there will be successive waves of assessment of third countries and it will therefore be a lengthy process. For example, Australia and Japan will not be in the first tier of countries as serious contenders for equivalence, he said.

Other major countries will be considered for equivalence and will have to be scrutinised for mutual interest, that is, whether they are an important market for European players.

For example, the Bermuda market is an important reinsurance market for European cedants, as is Switzerland or the Channel Islands, said Mr. Soussan.

“Other countries are not deemed as such high priority for European companies, rather the other way around, and so the desire to align standards is less compelling. While no third country ignores Solvency II, a number of jurisdictions would rather see the IAIS put forward a worldwide standard to make the whole of the non-EU move in the same direction. This means that, in a sense, Solvency II could be the first step towards a worldwide standard,” he predicted.

The position of the United States is a particularly tricky one because its state-based regulatory system means that it is not even formally recognised as a nation state in E.U. terms. And, of course, the U.S. still insists that foreign reinsurance companies lodge collateral against the premiums they underwrite there.

“There are some awesome hurdles to overcome to achieve any form of equivalence with the U.S. Because of the state system in the U.S., there is no single body that is in the driving seat and capable of getting closer to the Solvency II standard in an orderly fashion. There is no effective group supervision regime in the U.S.. The National Association of Insurance Commissioners has one under development and various associations are active in this respect. But, because the U.S. states demand collateral placed by foreign reinsurance companies for business written in the U.S., there is no scope for equivalence. Nevertheless U.S. companies are following the process closely and are reflecting on the consequences of absence of equivalence,” said Mr. Soussan.

But, Solvency II is not the only EU matter that falls under Mr. Soussan’s radar and which could cause sleepless nights for Europe’s risk and insurance managers.

As reported in the February issue of CRE there is a decent chance that the Commission will proceed with its consultation on Collective Redress and potentially introduce class actions into Europe despite the mountain of opposition it received to its Green Paper. Mr. Soussan thinks that the Commission will take this forward.

“We will have to see whether the new Commission (Directorate General SANCO) intends to follow this up. In my view, there has been enough consultation back and forth to convince the new Commission to take some action. There is no date for a White Paper but I do think there is still momentum. I cannot see them dropping the ball now, but they might go for something less ambitious such as boosting alternative dispute resolution mechanisms,” he said.

And of course the Block Exemption Regulation (BER) that allows co-operation on terms and conditions among European insurers runs out this month.

The BER will be replaced with a new and narrower regulation following the consultation process which ended in November.

The renewal was welcomed by the industry as only eighteen months ago it looked as if it would be lost altogether. But, as Mr. Soussan pointed out, the scope of the exemption will give the industry less room for manoeuvre.

The new regulation will, for example, include no exemption for ‘standard policy conditions’. This could mean that industry participants will be reluctant to cooperate on the creation of new non-binding standard terms and conditions in relation to new risks, said Mr. Soussan.

Subscription Saved

Pools will remain covered by the exemption. But, it is expected that existing pools will more easily exceed the market share thresholds that allow their exemption because they will include not only the policies sold by the pool but also the turnover achieved by its members outside the pool for the same insurance product, he added.

It seems, however, that the feared destruction of the subscription market will not occur but new guidance should be published, said Mr. Soussan.

“The new BER will continue to exclude from its scope ad hoc co(re)insurance arrangements on the subscription market. This leaves the issue of premium alignment between lead insurers and the followers on the subscription market largely unsettled,” he said.

“It is interesting to note that the corporate buyer community is not opposed to the continuation of the practice, particularly in light of recent market transparency initiatives. The market still expects some guidance, and above all some understanding from the Commission that this practice brings cognisable efficiencies eligible for individual exemption under certain circumstances. We understand that the Commission will issue a guidance communication at the same time as the BER is adopted and then leave it to companies to self-assess compliance either under the Regulation or guidance, that is, a result not dissimilar to the current position,” concluded Mr. Soussan.