Europe’s mutual insurers press for mandatory application of proportionality under Solvency II

The European risk and insurance management community has found an important ally in its efforts to ensure captives are granted more appropriate treatment under the proportionality principle within Solvency II, in the form of the Association of Mutual Insurers and Insurance Cooperatives in Europe (Amice). The association represents a powerful and growing sector within the European insurance community. About half of all licensed EU insurers are mutuals and their market share accounts for roughly a third of all European insurance business, valued at close to €400bn in premiums. Many mutuals are smaller businesses that, under the principle of proportionality, should not be subject to the full capital and reporting requirements of Solvency II, which was designed chiefly to provide greater protection for customers of the bigger listed European and international insurance groups. The good news is that before launching Solvency II in January 2016, the EU accepted that smaller, simpler and certain types of operations, such as many mutuals and captives, should not have to comply with the same onerous reporting and capital requirements as the big listed groups, and thus included the principle of proportionality within the directive. The bad news is that this principle is not mandatory. It is up to national supervisors to decide when, where and how it is applied. This has led to frustration among Europe’s risk captive community – represented at European level by Ferma and the European Captive Insurance and Reinsurance Owners Association (ECIROA) – which says national supervisors have failed to deliver. This has made it more difficult for risk and insurance managers to justify their captives, at a time when they are needed more than ever as market conditions rapidly harden in some sectors. Last year, the EC asked the European Insurance and Occupational Pensions Authority (EIOPA), which oversees national insurance supervisors across Europe, to provide technical advice for a comprehensive review of the Solvency II Directive. EIOPA will provide that technical advice in the form of a published Opinion in June 2020, and is seeking input from the market. This is clearly a good chance for the risk and insurance management community to persuade EIOPA that the proportionality principle is not being applied as consistently or as widely as possible. Ferma has presented a “concrete proposal” to European regulators for simpler, harmonised and more consistent Solvency II rules for captives, as part of the regulation’s upcoming review. The federation and other captive representatives seem increasingly optimistic that such work will lead to a reduction in the burden on captives. But Ferma and ECIROA are competing for attention with the huge European insurance industry, which is much more interested in ‘bigger issues’ such as long-term guarantee and equity risk measures that significantly affect their balance sheets and capital requirements. However, the news that Amice is as keen as the risk management community to see the proportionality principle strengthened will surely support their case. Late last month, Amice responded to EIOPA’s consultation paper for the Solvency II 2020 review on supervisory reporting and public disclosure. It called for proportionality waivers contained within the directive to be made mandatory rather than optional. “The waivers foreseen in Article 35(6) (7) of the Solvency II Directive should be made mandatory instead of optional,” stated Amice. “We welcome the proposed risk-based thresholds, however in their current form they will not represent a significant relief for undertakings. The proposed thresholds are too restrictive and they would not decrease the burden on insurance companies. Further risk-based thresholds, in addition to the ones proposed by EIOPA, should be developed; Furthermore, some of the new proposed risk-based thresholds should be improved so that they have an impact in terms of reducing the burden for insurers,” continued the association. It further stated that provisions that allow member states to exempt smaller undertakings from quarterly reporting are particularly important for many Amice members. “Most national supervisors have not to date implemented the proposed application thresholds (in terms of the market share covered) and only a handful of member states apply the exemption. In this respect, we request EIOPA to reconsider our proposal to replace ‘may’ in Article 35 (6) and (7) to ‘shall’, and request member states to grant an exception if the conditions are met,” it added. Sarah Goddard, secretary general of the association, explained to Commercial Risk Europe in a recent interview that the Solvency II review is a key focus for Amice. “As for all European insurers, the vast majority of mutual insurers have seen a profound impact from the adoption of Solvency II. The huge projects undertaken by the insurance market to implement the swingeing changes of the new regulation are well documented. For mutuals, the proportionality elements of nature, scale and complexity are still proving somewhat elusive in many European member states, yet the nature of their business structure should mean that proportionality is applied in many cases. This is something that we are tackling at Amice as part of the Solvency II 2020 Review,” she said. “Another aspect of the impact on the sector is the treatment of ‘Article 4’ companies, those that are extremely small and with limited business reach. There is a very piecemeal treatment of those insurers that fall into the sub-Solvency II environment – many of whom are mutuals – so that in some countries they are essentially subject to Solvency II while in others there is a much more appropriate regime,” added Ms Goddard. * The Solvency II Review will be part of the discussions at Amice’s stakeholder dialogue meeting in Paris on 4 December, which it is holding jointly with the International Cooperative and Mutual Insurance Federation. The topic will undoubtedly be further explored at Amice’s seventh biennial congress, which takes place in Bilbao on 10-12 May 2020.

Europe’s mutual insurers press for mandatory application of proportionality under Solvency II

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