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No 27 (July 2001/Juillet 2001/Juli 2001)
On 3rd July the Plenary session of the European Parliament approved the two reports (1) endorsing the proposals, adopted by the European Commission only last October for two Directives strengthening the solvency margin requirements for life and non-life insurance undertakings. While the Parliament has proposed a number of amendments, these are mainly technical and in line with the thrust of the original Commission proposals. The amendments are acceptable to both the Commission and the European Council and as a result, the new strengthened solvency margin rules are likely to be adopted very rapidly by the Council. The Commission proposals are priority measures under the Financial Services Action Plan.
The solvency margin is the extra capital that insurance undertakings are required to hold as a buffer against unforeseen events such as higher than expected claims levels or unfavourable investment results. The existing solvency margin rules date back to 1973 for non-life insurance and 1979 for life assurance. On 25 October 2000, the Commission adopted two proposals, as part of the Financial Services Action Plan, for Directives strengthening the existing rules: one covering life assurance, the other covering non-life insurance. Although there are two separate proposals for Directives they share many common features. These are the proposals Parliament has examined in the “Ettl reports”.
While the Parliament strongly supports the original Commission proposals strengthening the solvency margin requirements, it has also proposed a number of amendments. Most of these are technical refinements and are entirely in line with the thrust of the original Commission proposals. However, in a number of important amendments, Parliament has called for measures in creasing transparency and clarity.
In particular, Parliament has called for national authorities to establish guidelines covering the eligibility of supplementary contributions by the members of mutuals towards the solvency margin rules. Parliament has also asked the Commission to draw up a report on the use of the new early intervention powers for national supervisors proposed by the Commission. Under these powers, national supervisors will be able to take remedial action to protect insurance policyholders when the financial position of an insurance undertaking is deteriorating, even though the insurance under taking currently meets the solvency margin rules. The Commission is able to accept all the proposed amendments.
Whilst Parliament has been analysing the Commission proposals, parallel discussions have also been taking place at the same time in Council under the guidance of the Swedish Presidency. The analysis of the Commission proposals has benefited from much close co-operation between the three EU institutions which is now bearing fruit. Although the Council still has to formally respond to the proposed Parliamentary amendments, it is under stood that the amendments are in principle fully acceptable to the Council. On this basis, the prospects for the rapid adoption of the amended Commission proposals are extremely good. If so, this will be one of the first cases where complicated financial services legislation has been adopted through a single reading, i.e. without requiring a second round of examination by the Parliament and the Council. The original Commission proposals were adopted barely ten months ago, so this represents very rapid progress.
The proposed Directives update and strengthen the existing solvency margin rules and represent a package of measures which taken together significantly improve the existing rules. The proposals have already been described in SMN 24, but in addition to the early intervention powers, substantial increases in the minimum guarantee fund (i.e. the minimum capital required to be held by an insurance undertaking) are proposed as well as requiring a substantially higher solvency margin (50 per cent higher) for classes of insurance business that are more risky, e.g. marine, general and aviation liability.
However, the adoption of the so-called “Solvency I” package of measures is not the end of the story. The Commission has already started work on a much wider ranging review called “Solvency II”. This will examine the overall financial position of an insurance undertaking and is not just limited to the solvency margin. The “Solvency II” review will look at, inter alia, the level of technical provisions, the investment policy, the matching of assets to liabilities, reinsurance policy as well as the impact of accounting and actuTimes New Roman policies. This is a challenging exercise which is expected to take at least several years. The objective is to see if further improvements to the current rules for insurance undertakings can be found.
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(1) Rapporteur Mr. Ettl, Shadow Rapporteur, Ms. Villiers