On 26 February 2008, the European Commission issued an amended proposal to the Solvency II Directive Proposal (COM (2007) 361) which was adopted on 10 July 2007. The July 2007 version of the Solvency II Directive Proposal represented a recast of 13 existing Directives in the insurance and reinsurance sector, together with new solvency provisions.
The purpose of the February 2008 amended Solvency II Directive Proposal (COM (2008) 119) (the "Solvency II Proposal") is to take into account Directive 2007/44/EC of the European Parliament and Council which came into force on 21 September 2007 and to reflect the political agreement reached on the Rome I Regulation in December 2007.
Directive 2007/44/EC amended a number of existing Directives as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and the increase of holdings in the financial sector. However, that Directive came into force after the Solvency II Directive Proposal was submitted to the legislative authority. Changes introduced by that Directive have created discrepancies with the July recasting of the Solvency II Directive Proposal.
The Rome I Regulation deals with the law applicable to contracts and affects the applicable law and conditions of direct insurance contracts in the recast part of the Solvency II Directive Proposal.
The Solvency II Proposal now recasts a total of 14 Directives in the areas of life and non-life (re)insurance, reinsurance, (re)insurance groups and the winding-up of (re)insurance entities into a single text. No substantive amendments have been made to the consolidated texts of the existing Directives except for the changes necessary to introduce the new solvency regime. The recast is intended to improve the drafting, reduce complexity and delete obsolete Articles or parts of Articles.
The Solvency II Proposal applies to all life and non-life (re)insurance undertakings and possesses the same scope of application as the 14 existing Directives which it is intended to replace. The current exclusion for small mutual undertakings is, however, extended to all small insurance undertakings defined in Article 4, regardless of their legal form. The Commissions states that care has also been taken to ensure that the new solvency regime is not too burdensome for small and medium-sized (re)insurance undertakings.
A number of key principles are emphasised by the Solvency II Proposal including, principles based regulation (placing more responsibility on management than at present), supervision based on a prospective and risk-oriented approach and proportionality. Provision is also made for group supervision including a regime which seeks to facilitate capital management by groups.
In respect of the so-called "Pillar I" Solvency II requirements, these are set out in six sections: valuation of assets and liabilities, technical provisions, own funds, Solvency Capital Requirement, Minimum Capital Requirement and investments. The Pillar I requirements are based on an economic total balance sheet approach under which the entire balance sheet of a (re)insurance undertaking is appraised on an integrated basis under which assets and liabilities are valued consistently. A (re)insurance undertaking's available financial resources will need to cover its financial requirements (being the sum of un-subordinated liabilities and capital requirements). In consequence, eligible own funds will need to exceed the Solvency Capital Requirement.
To access the Solvency II Proposal in full and the correspondence table in respect of it, please click here. Source: European Commission, 26 February 2008.