# Solvency II: Restructuring the Insurance Sector (Part 4)

In part 4, the final part of the series on Solvency II, we will look at elements of Title II, III and IV of the Solvency II act.

TITLE II: Specific Provisions for Insurance and Reinsurance

This title covers specific provisions regarding life, and non-life insurance. It also covers provisions regarding community co-insurance; also covered are the provisions regarding the management of claims, conflict of interest, and health insurance as an alternative to social security.

TITLE III: Supervision of Insurance and Reinsurance Undertakings in a Group

The relation of the members within a group of insurance firms is dealt with in Title III and the relation of the entities therein. The directive states that one of those undertakings effectively exercises, through centralized coordination, a dominant i.e. influence over the decisions, including financial decisions, of the other undertakings that are part of the group; the group supervisor’s approval is required in the dissolution of such relationships. In this case the dominant entity will be considered the parent entity and the others as subsidiaries.

This title outlines the cases of application of group supervision:

1. Member States shall provide for supervision, at the level of the group, of insurance and reinsurance undertakings which are part of a group, in accordance with this Title.

2. Member States shall ensure that supervision at the level of the group applies as follows:

1. to insurance or reinsurance undertakings, which are a participating undertaking in at least one insurance undertaking, reinsurance undertaking, third-country insurance undertaking or third-country reinsurance undertaking.
2. to insurance or reinsurance undertakings, the parent undertaking of which is an insurance holding company which has its head office in the Community.
3. to insurance or reinsurance undertakings, the parent undertaking of which is an insurance holding company having its head office outside the Community or a third-country insurance or reinsurance undertaking.
4. to insurance or reinsurance undertakings, the parent undertaking of which is a mixed-activity insurance holding company. Where in the opinion of the supervisory authorities, the responsibility of the parent undertaking owning a share of the capital is strictly limited to that share of the capital, the group supervisor may nevertheless allow for the solvency deficit of the subsidiary undertaking to be taken into account on a proportional basis.

Elimination of double use of eligible own funds

The double use of own funds eligible for the Solvency Capital Requirement among the different insurance or reinsurance undertakings taken into account in that calculation shall not be allowed.

In the event of non-compliance with the Solvency Capital Requirement the supervisory authority having authorised the subsidiary shall, without delay, forward to the college of supervisors the recovery plan submitted by the subsidiary in order to achieve, within six months from the observation of non-compliance with the Solvency Capital Requirement, the reestablishment of the level of eligible own funds or the reduction of its risk profile to ensure compliance with the Solvency Capital Requirement.

The college of supervisors are expected to do everything within its power to reach an agreement on the proposal of the supervisory authority regarding the approval of the recovery plan within four months from the date on which non-compliance with the Solvency Capital Requirement was first observed.In the absence of such agreement, the supervisory authority having authorised the subsidiary shall decide whether the recovery plan should be approved, taking due account of the views and reservations of the other supervisory authorities within the college of supervisors.

The Commission is expected to make an assessment management within a group of insurance or reinsurance undertakings by 31 October 2015. It will also make an assessment of the benefit of enhancing group supervision and capital the report of the Committee on Economic and Monetary Affairs of the European Parliament on this proposal of 16 October 2008 (A6-0413/2008). That assessment shall include possible measures to enhance a sound cross-border management of insurance groups notably of risks and asset management. In its assessment, the Commission shall, inter alia, take into account new developments and progress concerning:

1. a harmonised framework on early intervention;
2. practices in centralised group risk management and functioning of group internal models including stress testing;
3. intra-group transactions and risk concentrations;
4. the behaviour of diversification and concentration effects over time;
5. a legally binding framework for the mediation of supervisory disputes;
6. a harmonised framework on asset transferability, insolvency and winding-up procedures which eliminates the relevant national company or corporate law barriers to asset transferability;
7. an equivalent level of protection of policy holders and beneficiaries of the undertakings of the same group particularly in crisis situations;
8. a harmonised and adequately funded EU-wide solution for insurance guarantee schemes;
9. a harmonised and legally binding framework between competent authorities, central banks and ministries of finance concerning crisis management, resolution and fiscal burden-sharing which aligns supervisory powers with fiscal responsibilities.

Guarantee fund is covered in Title IV: Reorganisation and Winding up of Insurance Undertakings. Member States may provide that one third of the required solvency margin shall constitute the guarantee fund. The guarantee fund shall not be less than EUR 3 million. Any Member State may provide for a 25 % reduction of the minimum guarantee fund in the case of mutual and mutual-type undertakings.

The Solvency II Directive is yet to go through a vote. This has raised concerns that further delays could lead to member countries going ahead with their own regulations for the insurance and reinsurance sector. Once through, Solvency II is going to be groundbreaking, setting a new uniform standard in the EU, and nudging other nations to do so too.

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