The new Act of 13 March 2016 on the status and supervision of insurance and reinsurance undertakings(hereinafter the 2016 Act) was published in the Belgian Official Gazette on 23 March 2016.
The 2016 Act replaces the Act of 9 July 1975 on the supervision of insurance undertakings (hereinafter the 1975 Act) and the Act of 16 February 2009 on reinsurance business (hereinafter the 2009 Act) with immediate effect.
The main goal of the 2016 Act is to transpose Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance (hereinafter the Solvency II Directive) in Belgian law. Belgium is quite late with this transposition, considering that the Solvency II Directive should have been implemented by 1 January 2016 at the latest. Since that date, however, the Belgian (re)insurance sector has already been applying the provisions of the Solvency II Directive in practice, which are now officially embodied in the 2016 Act. It should be noted that some of the provisions of the Solvency II Directive – in particular regarding non-life insurances – were not transposed in the 2016 Act, because they mostly involve the provision of information to and the protection of consumers. Such provisions do not belong in legislation of a prudential nature.
The Solvency I requirements were criticised in many areas, with the primary criticism being that they did not adequately take into account the real risks to which (re)insurance undertakings were exposed. As for the rules on technical provisions, the Solvency I Directive only imposed the obligation to calculate and book technical provisions, but the rules for doing so were not sufficiently harmonised at a European level, resulting in the lack of a level playing field between undertakings in different Member States.
Two other areas were also insufficiently harmonised and barely even regulated, namely: (i) the governance of (re)insurance undertakings; and (ii) the supervision of groups of insurance undertakings.
The most important objectives of the Solvency II Directive are as follows:
- maximum harmonisation for certain aspects, or, in any event, increased harmonisation at a European level;
- the use of an approach that comprises all balance components for risk assessments;
- a prospective vision on risk management;
- a valuation against market value of assets and liabilities;
- the taking into account of the real risks to which (re)insurance undertakings are exposed; and
- the determination of capital requirements based on calculations that take into account all risks, either by using a standard formula or by using a partial or total internal model.
This client alert emphasises the main changes between the 2016 Act and the previously applicable legislation (the 1975 Act and the 2009 Act) and/or Solvency II Directive.
Book I of the 2016 Act sets out the general provisions relating to the subject matter, scope and definitions. As regards the scope, the 2016 Act applies to Belgian (re)insurance undertakings, as well as to foreign (re)insurance undertakings which are active in Belgium or wish to become active through a branch or through the free provision of services. The scope thus remains unchanged in comparison to the previously applicable legislation.
The exclusions from the scope of the Solvency II Directive, which typically relate to statutory systems of social security, pension funds, export insurances guaranteed by the State, road-side assistance, etc. are copied in the 2016 Act. A new exclusion based on the Solvency II Directive relates to mutual undertakings which pursue non life-insurance activities and which are 100% reinsured by another mutual undertaking which is subject to the rules of the 2016 Act.
Noteworthy is the fact that the size-based exclusion from the scope for small undertakings (Article 4 of the Solvency II Directive) has not been implemented in the 2016 Act. Considering that a number of small insurance undertakings have already obtained authorisation under the Solvency I rules, the Belgian legislator has opted to submit them to the new solvency standards, but included certain modifications and exemptions that take into account their size and the lower risk of their transactions. The thresholds that must be met in order to qualify as a 'small' insurance undertaking are the following: (i) the undertaking's annual gross written premium does not exceed EUR 5 million; (ii) the total of the undertaking's technical provisions does not exceed EUR 25 million; (iii) the undertaking's business does not include insurance activities covering liability, credit and suretyship insurance risks, unless they constitute risks ancillary to the principal risk (Article 21, §2); (iv) the undertaking's business does not include reinsurance operations; and (v) the undertaking does not carry out activities abroad, either through a branch or through the free provision of services, and neither inside nor outside the EEA.
If such small undertakings have concluded an agreement regarding the provision of reinsurance or the full transfer of their obligations, they are almost fully exempt from the application of the provisions of the 2016 Act, with the exception of the provisions which enable the verification of compliance with these provisions and impose penalties for non-compliance. If they have not concluded such agreement, they are subject to the provisions of the 2016 Act, pursuant to the clarifications and modifications included in Articles 276 - 293, which introduce simplified requirements regarding own funds, governance, regulatory standards and technical provisions, reporting, recovery plans, etc.
Specific exemptions are also foreseen for local insurance undertakings, which limit their activity to the municipality where their registered office is located and/or the surrounding Belgian municipalities. As regards reinsurance undertakings, the Belgian legislator has not provided for specific provisions that differ from the regular system, given the risks which are inherent to reinsurance transactions.
Finally, reinsurance undertakings in run-off are not subject to the 2016 Act.
- (Re)insurance undertakings subject to Belgian law
The taking-up of the business of direct (re)insurance remains subject to prior authorisation from the regulator under the 2016 Act. It is possible for an undertaking to carry out insurance as well as reinsurance activities, provided it obtains a separate authorisation for each of these activities. The 2016 Act does, however, contain a transitional provision for insurance undertakings who currently carry out reinsurance activities without having obtained an authorisation as a reinsurance undertaking.
A major change of the Solvency II Directive and the 2016 Act relates to the introduction of new rules on governance of (re)insurance undertakings. These new governance rules intend to ensure that (re)insurance undertakings are efficiently and prudently governed.
The 2016 Act most notably clarifies or introduces the following features related to governance:
- a dual governance structure at management level. At the highest management level of the (re)insurance undertaking there should be a clear dividing line between: (i) the effective management of the (re)insurance undertaking; and (ii) the supervision of such management;
- specialised committees within the board. (Re)insurance undertakings are obliged to install an audit committee, remuneration committee and risk committee as part of the board:
- the audit committee monitors the financial reporting process, the efficiency of the systems for internal control and risk management, the internal audit, the legal control of the annual accounts and the consolidated accounts, and the independency and quality of the statutory auditor;
- the remuneration committee advises on the remuneration policy that should be adopted by the board. The remuneration committee's main duty is to assist the board in assessing the remuneration policy of the (re)insurance undertaking in order to improve the (re)insurance undertaking 's risk management; and
- the risk committee advises the management board on the present and future risk tolerance and risk strategy. In general, the risk committee's main duty is to assist the board in monitoring the implementation of this strategy by the executive committee;
- the obligation to have at least one independent director within the meaning of article 526ter of the Belgian Companies' Code (hereinafter BCC) in each of the aforementioned committees (audit committee, remuneration committee and risk committee);
- the mandatory formation of an executive committee, which is to be composed of at least three members of the board of directors, to whom all management powers are being delegated, except for the power to determine the general policy of the (re)insurance undertaking and all acts expressly reserved for the board of directors by the BCC or the 2016 Act. The positions of president of the board of directors and president of the executive committee may not be accumulated by one and the same person;
- the accumulation of management mandates with external mandates in other commercial companies is, as a general rule, allowed. Such accumulation is, however, subject to the specific internal rules of each (re)insurance undertaking, which must stipulate at least that: (i) the accumulation of those mandates may not lead to a situation where the managers of the (re)insurance undertakings are no longer sufficiently available in order to properly exercise their own management mandate within the (re)insurance undertaking; (ii) conflicts of interest and potential risks related to the exercise of external mandates should be prevented; and (iii) the accumulation of those mandates should be disclosed;
- all (re)insurance undertakings will have to obtain approval of the regulator prior to adopting strategic decisions, as defined in Article 15, 77° of the 2016 Act.
- Regulatory standards and obligations
The 2016 Act also sets out the technical provisions applicable to (re)insurance undertakings, such as the valuation rules, rules regarding technical provisions, own funds and capital requirements, rules regarding investments, and rules regarding the continuous inventory and localisation of assets.
As regards the valuation rules in general, the 2016 Act adopts the principle of the transfer value set out in recital 55 of the Solvency II Directive. Article 123 clarifies that the creditworthiness of the (re)insurance undertaking should not be taken into account for the valuation of assets and liabilities. The transfer value for valuating the technical provisions has two components: the best estimate and the risk margin. The best estimate is obtained by discounting all incoming and outgoing cash flows, such as distributions for future losses, future premiums, costs, etc. A risk margin must be added to the amount calculated for the best estimate. The best estimate and risk margin should, in principle, be valuated separately. However, they can be calculated together by using the replicating portfolio technique.
To counter the volatility of the technical provisions, several measures have been implemented: extrapolation of the relevant risk-free interest rate term structure, matching adjustment and volatility adjustment.  As regards the volatility adjustment, Member States were granted the possibility by the Solvency II Directive to decide whether or not its use would be subject to preliminary authorisation by the regulator. The Belgian legislator decided to opt for a simple notification to the NBB.
The 2016 Act also sets out the most important provisions with regard to own funds, the solvency capital requirement (the SCR) and the minimal capital requirement (the MCR). In order to calculate the SCR, undertakings must measure all risks to which they are exposed (insurance technical risks, operational risks, market risks, etc.) to assess whether they have sufficient own funds to cover such risks. To calculate the SCR, undertakings may choose between a standard formula or a full or partial internal model. The MCR is the level of own funds required to minimise the event of a bankruptcy in the coming year to 0.5%. The MCR must at be a minimum of 25% and maximum of 45% of the SCR, but may in any event not be less than EUR 2.5 or 3.7 million (depending on the branches and activities). To meet the above requirements, a distinction is made between basic own funds, generally consisting of balance sheet items, and ancillary own funds, consisting of non-balance sheet items, such as non-paid up capital, guarantees, etc.
As regards the MCR, the 2016 Act foresees that, until 31 December 2017, its calculations shall be exclusively carried out on the basis of the standard formula, even if the undertaking employs a (full or partial) internal model. In compliance with the Solvency II Directive, only one SCR must be calculated for undertakings which pursue both life and non-life insurance activities. On the other hand, these mixed undertakings will still have to comply with a double MCR, as if they only pursued only one (life or non-life) activity.
As is the case in the Solvency II Directive, the 2016 Act mentions the "prudent person" principle with regard to investments. Whereas the Solvency I Directive extensively specified in which type of assets undertakings may invest, and determined the percentages applicable to each of these types, the Solvency II Directive now imposes a general prudence concept. This principle will have to be further elaborated in the EU regulations supplementing the Solvency II Directive, as well as in EIOPA guidelines and circulars of the NBB.
The 2016 Act also introduces two new rules which differ from the previously applicable legislation and the Solvency II Directive. The first set concerns the obligation to maintain a continuous inventory, which relates to the priority right of insurance creditors as discussed further in this client alert. To make the protection of insurance creditors efficient, the rules regarding the identification of the underlying assets and their value (i.e. the amount for which assets should be held to constitute the object of such priority right and how to valuate such assets to come to such amount) are established in Articles 194 - 195.
The second set concerns the rules on the localisation of assets. As mentioned, the Solvency II Directive introduces a total liberty of investment, in terms of percentages and investment limitations, as well as in terms of localisation of investments. In this respect, only agreements relating to risks located outside the EEA can be subject to restrictions. The localisation of assets outside the EEA raises a problem of efficiency of the measures limiting the free disposal of assets, especially when the undertaking is in difficulty and the supervising authority is required to take action to protect insurance creditors, since the Belgian supervising authority will only seldom be able to rely on a cooperation agreement with the supervising authority of the country where the assets are located to execute such measures.
For that reason, and to limit the risk of undertakings towards their depositaries, the localisation of any assets located outside the EEA is made subject to two cumulative conditions with regard to financial instruments held with depositaries outside the EEA: (i) the (re)insurance undertaking must have a right in rem on the assets in question; and (ii) a commitment is required from the depositary in order to block these assets at the NBB's request.
- Recovery plan and measures
Since the implementation of the BRRD for credit institutions, which foresees the obligation for credit institutions to draw up a recovery plan, a similar requirement has been implemented in the 2016 Act. Contrary to what is required for credit institutions, there is no obligation for every (re)insurance undertaking to draw up a recovery plan. Instead, the NBB can require certain undertakings to establish a recovery plan when this is necessary, given the potential risk of a substantial deterioration of the financial position of the (re)insurance undertaking. A recovery plan must describe the measures the undertaking will take to restore its financial position when this significantly deteriorates. Such plan must contain quantitative and qualitative indicators indicating at which times the management should investigate whether the measures of the plan should be executed. The recovery plan must be approved by the NBB.
Most of the provisions relating to (re)insurance undertakings in difficulty or in an irregular situation were copied from the Solvency II Directive and/or the previously applicable legislation. Some new provisions were introduced in order to improve the effectiveness of recovery measures. For instance, the situations that trigger the application of recovery instruments are widely defined in order to grant the NBB the discretionary power to choose the most appropriate instrument, taking into account the principle of proportionality.
- Prudential supervision
Many of the provisions, with regard to the supervision by the NBB, are copied from existing legislations. The NBB is empowered to request any relevant document, carry out inspections, interrogate persons, send experts, or cooperate with other Belgian or foreign entities. The 2016 Act introduces a new confidentiality duty for inspection reports and other documents issued by the NBB.
The 2016 Act distinguishes several levels of group supervision depending on whether (re)insurance undertakings or other undertakings (in particular other categories of undertakings from the financial sector or holdings) are involved and whether they are based in the EEA or in third countries. It is also possible to form subgroups at a national level.
The supervision domains are similar to those regarding the oversight on individual undertakings, i.e. group solvency, risk concentrations and intra-group transactions, governance at group level, and information to the public. It will have to be determined which supervisor is designated as group supervisor and who will be responsible for the coordination and the exercise of oversight within the college of supervisors.
- Termination of authorisation
The various ways in which the authorisation may be terminated are set out in the 2016 Act, i.e.renunciation (voluntary act of the undertaking), withdrawal for non-use, liquidation or revocation due to failure of the short-term finance scheme.
The termination of authorisation leads to a prohibition against concluding new agreements. It does not, however, put an end to oversight by the regulator as long as the undertaking has (re)insurance obligations, except in the case of bankruptcy of the undertaking.
- Third-country (re)insurance undertakings
The 2016 Act now regulates the conditions under which third-country insurance undertakings can establish a branch in Belgium, which are similar to the rules for Belgian insurance undertakings, but certain specific provisions are foreseen in order to take account of the fact that these branch offices do not have either a legal personality or a legal body. For third-country reinsurance undertakings, the 2016 Act refers to the regime of the Solvency II Directive, which makes a distinction depending on whether the oversight regime applicable to these undertakings in their home country is considered equivalent to that of the Solvency II Directive.
- Substantive law aspects of winding-up proceedings
The priority right of insurance creditors is one of the most important substantive law aspects of Book VII of the 2016 Act. Insurance creditors have a priority right on the assets representing the technical provisions, which is accompanied by the obligation for insurance undertakings to keep a continuous inventory of those assets. A major change with regard to the current regime is that the number of types of separate management has been reduced to three, i.e. a separate management for all non-life activities, a separate management for all life activities (with the exclusion of branches 23, 26 and 27) and a separate management for insurance activities belonging to branches 23, 26 and 27 (for which the investment risk is borne by the policyholder). Of course, this reduction in the number of types of separate management does not affect the obligations of insurance undertakings regarding the composition of the various branch 21 and 23 funds and, in general, the obligations regarding the collection of data on a number of products or transactions for the purpose of, e.g. monitoring profit-sharing.
Insurance creditors also have a second priority right on the entirety of the assets of the insurance undertaking, which is, however, only implemented after the winding-up of the various types of separate management. The 2016 Act enhances the ranking of this priority right in comparison to the previously applicable legislation, under which this right was virtually useless. From now on, only the priority rights of employees, tax authorities, social security systems and holders of rights in rem prevail on this priority right.
- Final, amending, transitional and repealing provisions
Book VIII of the 2016 Act contains transitional provisions relating to (re)insurance undertakings which have already obtained the required authorisation prior to the entry into force of the 2016 Act. The authorisations and registrations of these undertakings are maintained, as well as all decrees and regulations adopted in implementation of the 1975 Act or the 2009 Act and all individual decisions pursuant to these acts, as long as they do not conflict with the 2016 Act.
Other transitional provisions relate to:
- the obligations regarding reporting and providing information to the public, for which the undertakings enjoy extended deadlines during the first four years of implementation of the new supervisory regime;
- the possibility to consider the own funds accrued under the previous regime as Tier 1 or Tier 2 own-fund items of level 1 or level 2 for a period of ten years;
- the introduction of flexibilities in the standard formula for calculating the solvency capital requirement as regards the spread risk (four years) and the equity risk (seven years);
- the granting of an additional two-year period to comply with solvency capital requirements for undertakings that do not meet these requirements but that possessed the solvency margin under the previous regime; and
- the progressive and linear shift over a 16-year period of the technical provisions under the Solvency I Directive to the level of technical provisions under the Solvency II Directive (best estimate and risk margin).
- Entry into force
The 2016 Act has entered into force as of 23 March 2016.
- Classification of life insurance branches
The Annexes to the 2016 Act reprise the relevant annexes of the Solvency II Directive and replace those of the Royal Decree of 12 February 1991 laying down the general regulation for the supervision of insurance undertakings. The only significant change concerns the restructuring of Annex II relating to the classification of life insurance branches in order to follow the classification and clarifications contained in Article 2 of the Solvency II Directive.