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The Solvency ii Directive
 
CHAPTER IV

CONDITIONS GOVERNING BUSINESS

SECTION 1 – RESPONSIBILITY OF THE ADMINISTRATIVE OR MANAGEMENT BODY

Article 40
Responsibility of the administrative or management body


Member States shall ensure that the administrative or management body of the insurance or reinsurance undertaking has the ultimate responsibility for the compliance, by the undertaking concerned, with the laws, regulations and administrative provisions adopted pursuant to this Directive.


SECTION 2 - SYSTEM OF GOVERNANCE

Article 41
General governance requirements


1. Member States shall require all insurance and reinsurance undertakings to have in place an effective system of governance which provides for sound and prudent management of the business.

That system shall at least include an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information. It shall include compliance with the requirements laid down in Articles 42 to 48.

The system of governance shall be subject to regular internal review.

2. The system of governance shall be proportionate to the nature, scale and complexity of the operations of the insurance or reinsurance undertaking.

3. Insurance and reinsurance undertakings shall have written policies in relation to at least risk management, internal control, internal audit and, where relevant, outsourcing. They shall ensure that those policies are implemented.

Those written policies shall be reviewed at least annually. They shall be subject to prior approval by the administrative or management body and be adapted in view of any significant change in the system or area concerned.

3a. Insurance and reinsurance undertakings shall take reasonable steps to ensure continuity and regularity in the performance of their activities, including the development of contingency plans. To this end the undertaking shall employ appropriate and proportionate systems, resources and procedures.

4. The supervisory authorities shall have appropriate means, methods and powers for verifying the system of governance of the insurance and reinsurance undertakings and for evaluating emerging risks identified by those undertakings which may affect their financial soundness.

The Member States shall ensure that the supervisory authorities have the powers necessary to require that the system of governance be improved and strengthened to ensure compliance with the requirements set out in Articles 42 to 48.


Article 42
Fit and proper requirements for persons who effectively run the undertaking or have other key functions


1. Insurance and reinsurance undertakings shall ensure that all persons who effectively run the undertaking or have other key functions meet at all times the following requirements:

(a) their professional qualifications, knowledge and experience are adequate to enable sound and prudent management (fit);

(b) they are of good repute and integrity (proper).

2. Insurance and reinsurance undertakings shall notify the supervisory authority of any changes to the identity of the persons who effectively run the undertaking or are responsible for other key functions, along with all information needed to assess whether any new persons appointed to manage the undertaking are fit and proper.

3. Insurance and reinsurance undertakings shall notify their supervisory authority if any of the persons mentioned in paragraphs 1 and 2 have been replaced because they no longer fulfil the requirements referred to in paragraph 1.


Article 42a
Proof of good repute


1. Where a Member State requires of its own nationals proof of good repute and proof of no previous bankruptcy, or proof of either of these, that Member State shall accept as sufficient evidence in respect of nationals of other Member States the production of an extract from the "judicial record" or, failing this, of an equivalent document issued by a competent judicial or administrative authority in the home Member State or the Member State from which the foreign national comes showing that these requirements have been met.

2. Where the home Member State or the Member State from which the foreign national concerned comes does not issue the document referred to in paragraph 1, it may be replaced by a declaration on oath – or in Member States where there is no provision for declaration on oath by a solemn declaration – made by the foreign national concerned before a competent judicial or administrative authority or, where appropriate, a notary in the home Member State or the Member State from which that foreign national comes.

Such authority or notary shall issue a certificate attesting the authenticity of the declaration on oath or solemn declaration.

The declaration referred to in the first subparagraph in respect of no previous bankruptcy may also be made before a competent professional or trade body in the Member State concerned.

3. The documents and certificates referred to in paragraphs 1 and 2 shall not be presented more than three months after their date of issue.

4. Member States shall designate the authorities and bodies competent to issue the documents referred to in paragraphs 1 and 2 and shall forthwith inform the other Member States and the Commission thereof.

Each Member State shall also inform the other Member States and the Commission of the authorities or bodies to which the documents referred to in paragraphs 1 and 2 are to be submitted in support of an application to carry on in the territory of this Member State the activities referred to in Article 2.


Article 43
Risk management


1. Insurance and reinsurance undertakings shall have in place an effective risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report, on a continuous basis the risks, on an individual and aggregated level, to which they are or could be exposed, and their interdependencies.

That risk management system shall be effective and well integrated into the organisational structure and in the decision making processes of the insurance or reinsurance undertaking with proper consideration of the persons who effectively run the undertaking or have other key functions.

2. The risk management system shall cover the risks to be included in the calculation of the Solvency Capital Requirement as set out in Article 101(4) as well as the risks which are not or not fully included in the calculation thereof.

It shall cover at least the following areas:

(a) underwriting and reserving;

(b) asset – liability management;

(c) investment, in particular derivatives and similar commitments;

(d) liquidity and concentration risk management;

(da) operational risk management;

(e) reinsurance and other risk mitigation techniques.

The written policy on risk management referred to in Article 41(3) shall comprise policies relating to points (a) to (e) of the second subparagraph of this paragraph.

3. As regards investment risk, insurance and reinsurance undertakings shall demonstrate that they comply with Chapter VI, Section 6.

4. Insurance and reinsurance undertakings shall provide for a risk management function which shall be structured in such a way as to facilitate the implementation of the risk management system.

5. For insurance and reinsurance undertakings using a partial or full internal model approved in accordance with Articles 110 and 111 the risk management function shall cover the following additional tasks:

(a) to design and implement the internal model;

(b) to test and validate the internal model;

(c) to document the internal model and any subsequent changes made to it;

(d) to inform the administrative or management body about the performance of the internal model, suggesting areas needing improvement, and up-dating that body on the status of efforts to improve previously identified weaknesses;

(e) to analyse the performance of the internal model and to produce summary reports thereof.


Article 44
Own risk and solvency assessment


1. As part of its risk management system every insurance or reinsurance undertaking shall conduct its own risk and solvency assessment.

That assessment shall include at least the following:

(a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking;

(b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapters VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2;

(c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3.

2. For the purposes of point (a) of paragraph 1, the undertaking concerned shall have in place processes, which are proportionate to the nature, scale and complexity of the risks inherent to its business, and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in this assessment.

3. In the case referred to in point (c) of paragraph 1 when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration.

4. The own risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking.

5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile.

6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own risk and solvency assessment as part of the information reported under Article 35.

6a. The own risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement can only be adjusted in accordance with Articles 37, 229, 230, 231 and 236.


Article 45
Internal control


1. Insurance and reinsurance undertakings shall have in place an effective internal control system.

That system shall at least include administrative and accounting procedures, an internal control framework, appropriate reporting arrangements at all levels of the undertaking and a compliance function.

2. The compliance function shall include advising the administrative or management body on compliance with the laws, regulations and administrative provisions adopted pursuant to this Directive.
 
It shall also include an assessment of the possible impact of any changes in the legal environment on the operations of the undertaking concerned and the identification and assessment of compliance risk.


Article 46
Internal audit


1. Insurance and reinsurance undertakings shall provide for an effective internal audit function.
 
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The internal audit function shall include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the governance system.

3. The internal audit function shall be objective and independent from the operational functions.

4. Any findings and recommendations of the internal audit shall be reported to the administrative or management body which shall determine what actions shall be taken with respect to each of the internal audit findings and recommendations and shall ensure that these actions are carried out.


Article 47
Actuarial function


1. Insurance and reinsurance undertakings shall provide for an effective actuarial function to undertake the following:

(a) to coordinate the calculation of technical provisions;

(b) to ensure the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions;

(c) to assess the sufficiency and quality of the data used in the calculation of technical provisions;

(d) to compare best estimates against experience;

(e) to inform the administrative or management body of the reliability and adequacy of the calculation of technical provisions;

(f) to oversee the calculation of technical provisions in the cases set out in Article 81;

(g) to express an opinion on the overall underwriting policy;

(h) to express an opinion on the adequacy of reinsurance arrangements;

(i) to contribute to the effective implementation of the risk management system referred to in Article 43, in particular with respect to the risk modelling underlying the calculation of the capital requirements set out in Chapter VI, Sections 4 and 5 and the assessment referred to in Article 44.

2. The actuarial function shall be carried out by persons who have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the business of the insurance or reinsurance undertaking, and who are able to demonstrate their relevant experience with applicable professional and other standards.


Article 48
Outsourcing


1. Member States shall ensure that, when insurance and reinsurance undertakings outsource functions or any insurance or reinsurance activities, the undertakings remain fully responsible for discharging all of their obligations under this Directive.

2. Outsourcing of critical or important operational functions or activities shall not be undertaken in such a way as to lead to any of the following:

(a) impairing materially the quality of the governance system of the undertaking concerned;

(b) increasing unduly the operational risk;

(c) impairing the ability of the supervisory authorities to monitor the compliance of the undertaking with its obligations;

(d) undermining continuous and satisfactory service to policyholders.


3. Insurance and reinsurance undertakings shall, in a timely manner, notify the supervisory authorities prior to the outsourcing of critical or important functions or activities as well as of any subsequent material developments with respect to those activities.


Article 49
Implementing measures


1. The Commission shall adopt implementing measures to further specify the following:

(a) the elements of the systems referred to in Articles 41, 43, 45 and 46, and in particular the areas to be covered by the asset – liability management and investment policy, as referred to in Article 43(2), of insurance and reinsurance undertakings;

(b) the functions referred to in Articles 43, 45, 46 and 47;

(c) the requirements set out in Article 42 and the functions subject thereto;

(d) the conditions under which outsourcing, in particular to service providers located in third countries, may be performed.

2. Where it is necessary to ensure appropriate convergence of the assessment referred to in Article 44 (1)(a), the Commission may adopt implementing measures to further specify the elements of that assessment.

3. Those measures designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).
 
   
 
Return to Index
 
Solvency ii Introduction (1) to (10)
 
Solvency ii Introduction (11) to (20)
 
Solvency ii Introduction (21) to (30)
 
Solvency ii Introduction (31) to (40)
 
Solvency ii Introduction (41) to (50)
 
Solvency ii Introduction (51) to (60)
 
Solvency ii Introduction (61) to (70)
 
Solvency ii Introduction (71) to (80)
 
Solvency ii Introduction (81) to (95)
 
Solvency ii Articles 1 to 10
 
Solvency ii Articles 11 to 20
 
Solvency ii Articles 21 to 30
 
Solvency ii Articles 31 to 39
 
Solvency ii Articles 40 to 49
 
Solvency ii Articles 50 to 62
 
Solvency ii Articles 63 to 71
 
Solvency ii Articles 72 to 85
 
Solvency ii Articles 86 to 99
 
Solvency ii Articles 100 to 125
 
Solvency ii Articles 126 to 142
 
Solvency ii Articles 143 to 159
 
Solvency ii Articles 160 to 173
 
Solvency ii Articles 174 to 203
 
Solvency ii Articles 204 to 215
 
Solvency ii Articles 216 to 233
 
Solvency ii Articles 234 to 262
 
Solvency ii Articles 263 to 298
 
Solvency ii Articles 300 to 313
 
Solvency ii ANNEX 1 to 3
 
Solvency ii ANNEX 4 to 5