Insurance Prudential [EU]

Regulation and Prudential

Financial and prudential supervision is the responsibility of the home state authorities.  They must monitor the entire business and must ensure that the requisite technical provisions are made, and that sound administrative and accounting procedures and controls are provided.

There are separate detailed directives for life and non-life insurance.  The conditions of authorisation have been harmonised in the EU. The non-life insurance directive makes provision regarding technical provisions and solvency tests.

There are technical provisions in respect of

• claims and obligations.
• own funds obligations.
• solvency capital requirements
• minimum capital requirements
• investment,

Insurance companies must make provisions for their liabilities and obligations calculated in accordance with actuarial assumptions and interest rates fixed by the authority in the home state.  The information must be made available to the public as to the calculation of the required provision.

The value of assets must correspond to the amount for which they could be exchanged in a transaction.  The liability is valued at the amount for which it could be transferred in a transaction.

Insurance companies must diversify their investments.  There are thresholds in respect of which assets may be invested to cover the provisions. Insurance and reinsurance undertakings must only invest in assets and instruments whose risk can be easily identified.

Solvency / Capital

There must be an adequate solvency margin.  This may comprise of certain assets.  One-third of the solvency margin must constitute a guarantee fund which must be of a minimum amount.  The guarantee fund is reviewed, and the competent authority must require a restoration plan if the guarantee fund is inadequate.

Technical provisions apply in relation to all insurance and reinsurance obligations to policyholders and beneficiaries of insurance and reinsurance contracts.  The value of technical provision shall correspond to the amount the insurance and reinsurance undertakings would have to pay, if they were to transfer their insurance and reinsurance obligations, immediately to another undertaking.  This is to be based on a best estimate and risk margin.

Own funds consist of the excess of assets over liabilities and subordinated liabilities; Ancillary own funds consisting of items other than basic own funds, which can be called up to absorb losses. Eligible basic funds must cover the minimum capital requirements.  This corresponds to the amount of the eligible basic own funds, below which policyholders and beneficiaries may be exposed to a high level of risk.

The minimum capital requirement shall have an absolute floor of €2.2 million for non-life assurance, €3.2 million for life assurance and reinsurance undertakings.

If the value of technical provisions do not correspond to the amount insurance and reinsurance undertakings would have to pay, if they were to transfer their obligations immediately to another undertaking, the supervisory authorities may prohibit the free disposal of assets.

If the capital requirements for an undertaking are no longer complied with, it must inform the supervisory authority.   It must submit a recovery plan, once the noncompliance of the solvency capital has been recorded.

There are specific provisions in relation to the accounts of the insurance company.  A precise layout is prescribed.  Certain notes must be provided for.

Solvency II

The Solvency II Directive requires insurance companies to hold enough financial resources. It also sets out management and supervisory rules. The directive covers non-life insurance, life insurance and reinsurance companies.

Insurance companies have to hold capital in relation to their risk profiles to guarantee that they have sufficient financial resources to withstand financial difficulties. They have to comply with capital requirements:

• the minimum capital requirement (MCR): the minimum level of capital below which policyholders would be exposed to a high level of risk;
• the solvency capital requirement (SCR): the capital that an insurance company needs in cases where significant losses have to be absorbed. The amount of capital is calculated by taking into account different risks such as:the market risk: the risk of loss or change of the financial situation resulting from markets fluctuations;the operational risk: the risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events.

If a company does not respect the two amounts of capital required, the supervisor has to take action.

Insurance companies have to put in place an adequate and transparent governance system with a clear allocation of responsibilities. They must have the administrative capacity to deal with different issues including risk management, compliance with the legislation, and internal audit.

Insurance companies have to conduct their own risk and solvency assessment (ORSA) on a regular basis. This involves assessing the risk solvency needs in relation to their risk profiles, as well as their compliance with the financial resources required.

The legislation sets out a ‘Supervisory Review Process’ (SRP) that enables supervisors to review and evaluate insurance companies\’ compliance with the rules. The aim is to help supervisors to identify companies that may enter difficulties. Insurance companies also have to disclose information publicly.

The competent authority must conduct supervisory reviews ensuring compliance with the requirements. There is a requirement for reporting to the market, consumer and supervisory authorities

Additional capital requirements may be imposed following supervisory review where they depart to much from the assumptions of the solvency capital requirement.