Author: María Nuche Otero
Directive 2009/138 EC of the European Parliament and the European Council, of 25 November 2009, on life insurance, access to insurance and reinsurance activities and the functioning of same, (Solvency II Directive), brings about significant progress in the establishment and recognition of common and standardized regulations applicable to all insurance groups carrying out their activities within the European Union.
This EC regulation requires a necessary adaptation to a new regulatory environment on the part of all insurance groups and gives an absolutely leading role to additional supervision at group level, which is founded on a risk management-based focus, and which encompasses such diverse multidisciplinary aspects that it requires the involvement of each of the integrating elements of the group’s global structure.
Thus, for the first time, a global, complete and complex guidelines framework for insurance groups has been adopted within the European Union, guaranteeing equal rules of play for all participants in the insurance common market, and which ultimately implies a standardized level of protection of the interests of insured parties across the European Union.
The main objective of my book “El impacto de Solvencia II en los grupos de entidades aseguradoras” (“The impact of Solvency II on insurance companies”), published by Fundación MAPFRE, was to identify, analyze and examine each of the aspects regulated by Solvency II that may have a potential impact on the management of European insurance groups, detecting those areas or issues that, due to their particular relevance, may have a greater impact, both because they translate into higher or lower capital requirements for the group, and because they imply in-depth changes within the organization, its management or the insurance group’s very structure.
The focus of the book is highly ambitious in terms of its scope, given that it deals with issues as diverse as the scope of group supervision, group solvency calculation, the governance system and ORSA (Own Risk and Solvency Assessment) at group level, third-country equivalence assessment, the particularities of mutual groups and groups adopting centralized risk management models, and the obligation to provide information to regulatory supervisors and public information requirements of insurance groups. In short, it offers a comprehensive analysis of the requirements facing insurance groups in relation to the three pillars of Solvency II.
Thus, the risk-oriented focus, the forward-looking vision of the business, the market valuation of the balance sheet elements, the requirements of a regulatory capital based on assumed risks, the requirements around the governance system and the exhaustive transparency requirements as regards the market and the supervisor are all aspects that will be applied, having changed what needs to be changed, at group level and have therefore been the subject of an in-depth analysis in this book.
The book takes a practical approach and attempts to cover the varied circumstances existing in European insurance groups and centering on the specific characteristics of the Spanish insurance market.
As such, exhaustive analysis of the main aspects relating to the application of Solvency II to insurance groups was carried out:
1. The supervision of Spanish insurance groups: origin and evolution
As a starting point, the development of the supervision of Spanish insurance groups was carried out, specifically the supervision regulations applicable to Solvency I, as well as the accounting regulations applicable to same.
2. Insurance groups subject to supervision under Solvency II: regulation, scope and supervision
Solvency II introduces important changes in the definition and scope of the insurance groups subject to supervision. Likewise, changes are introduced in the treatment of some subsidiaries and investees that affect the final structure of the groups subject to supervision and therefore the solvency calculation at group level.
The Solvency II Directive sets down group supervision at European parent company level as a general principle by identifying a group Supervisor, although it also includes the possibility of applying other intermediate supervision levels.
As a consequence of the change in supervisory focus, the Solvency II regulations require more coordination than ever before among European supervisory authorities involved in the supervision of each group.
To facilitate this, numerous regulations with different legal scopes are being put in place to regulate how these relationships develop. These regulations are the first step in the establishment of the rules of play, but make it possible for the supervisory authorities, via the Coordination Agreements of the Institutes of Supervision, to internally and jointly design the dynamic governing the relationships that will define their activity in supervising the group.
3. Financial situation of the insurance groups (Pillar I)
One of the most significant changes of the Solvency II regulations is the method used to calculate solvency at group level, the approach of which is based on risks and very specific mechanisms regarding the application of two calculation methods (consolidation and deduction-aggregation) as well as the assessment of the different associated companies, in line with their legal nature and their degree of association.
Group solvency supervision is complemented with the supervision of the intragroup operations and risk concentrations.
4. Third country equivalence assessment
Another significant update of Solvency II is the third country equivalence assessment procedure carried out by the European Commission, EIOPA (European Insurance and Occupational Pensions Authority) and the national supervisors, as well as the impact that said assessment will have on groups with parent companies or subsidiaries located in said third countries.
5. Particularities of certain types of groups: groups with centralized risk management and mutual groups
The book also analyzes the regime applicable to groups practicing centralized risk management, a residual system of the “group support” regime envisaged in the initial negotiations of the Solvency II Directive, as well as the national regulatory development planned for the groups formed by mutual insurance companies and mutual provident societies.
6. Group governance system and group ORSA (Pillar II)
The Solvency II Directive regulates the so-called Pillar II requirements regarding the governance system of the insurance and reinsurance companies and their groups and the own risk and solvency assessment (ORSA).
All requirements regarding the governance system at individual level will be applicable, having changed what needs to be changed, at group level. These requirements cover different aspects, such as:
- General governance requirements
- Fit and proper requirements
- Risk management and internal control
- Key functions
7. Public information for the purposes of supervision at group level (Pillar III)
Transparency and reporting obligations contained in the Solvency II regulations for groups of insurance and reinsurance companies aim to inform, both the market and the supervisors, of the risks in place and the management of same by insurance groups, in such a way that an assessment can be made of the adequacy of this management and its impact on their financial and equity situation.
The book El impacto de Solvencia II en los grupos de entidades aseguradoras (The impact of Solvency II on insurance groups) (Fundación MAPFRE) can serve as a reference point for all those interested in gaining a better understanding of the issues mentioned here: