The Council of the European Union has published a progress report on its Solvency II working party. The working party has been reviewing the Commission’s proposed draft Directive on the new solvency regime and has taken the opportunity to report back on its initial findings.

The Commission submitted the proposed directive to the Council in July. The Solvency II Directive is a key part of the Financial Services Action Plan with the objective to deepen the integration of the European insurance and reinsurance markets, to enhance the protection of policyholders across the European Union, to promote better regulation of insurers and to improve the international competitiveness of European insurers and reinsurers.

The Commission’s proposals have been discussed by the Council and, in general, Member States have been supportive of the proposals. According to the Council’s progress report there are still some “sensitive issues” that need to be addressed.

One concern has been to ensure that while the different levels of the Lamfalussy progress are maintained, there needs to be a greater balance between the principles-based text and a guarantee of legal certainty. Several amendments are proposed in order to improve the understanding of the principles set out in the Directive. Included in these changes are: a clarification of the meaning of the exceptional nature of capital add-ons; inclusion of a reference to the broader concept of business continuity, while maintaining references to contingency plans; clarification of the relationships between the different functions in the system of governance; and delimitation of the concept of function and of the scope of key functions.

Further, the Council is concerned that a proper application of the proportionality principle is applied so that unnecessary and excessive requirements for both insurers and supervisors are avoided. In particular, the Council wishes to ensure that Solvency II does not create a two-tier system for large insurers and SMEs. The response notes that the Level 2 implementing measures should allow for an application which is compatible with the nature, scale and complexity of the risks inherent to the business, requiring compliance but avoiding the new regime being “excessively burdensome”. The response notes that it should be made clear that the “own risk and solvency” assessment does not require the development of an internal model or the calculation of an additional capital add-on. Also, to clarify that undertakings may use, for supervisory reporting purposes, elements publicly disclosed under financial reporting, listing and other legal regulatory requirements.

The Council’s response highlights the need to adequately reflect the necessary powers of intervention of supervisory authorities in the context of the new risk-based regime. For example, amendments have been suggested to better identify the cases and consequences of the exceptional imposition by the supervisory authority of the capital add-on.

Finally, in recognition of the innovative regime of group supervision being proposed, the Council working party suggest that further work is needed on: the impact of the integration of the internal market on competition at national level; the impact on the protection of policyholders and beneficiaries in crisis situations; clarification of the legal and practical aspects encompassing the certainty of the cross-border fund transfer between different entities within a group; and clarification of the role of the “College of Supervisors” as well as CEIOPS’ role within the Lamfalussy process.

For further information: Solvency II - progress report