Solvency II and 3rd country equivalence
Welcome to the May 2010 edition of the Solvency ii
Association newsletter
Dear Members,
Today we will discuss one of the most important developments in
the insurance and reinsurance industries: The equivalence of
third countries with the Solvency ii directive. We have an
interesting new paper.
CEIOPS’’ Advice for Level 2
Implementing Measures on Solvency II: Technical criteria for
assessing 3rd country equivalence in relation to art. 172, 227
and 260
(Former CP78)
- March 2010
1. Introduction:
1.1. In its
letter of 12 June 2009, the European Commission (Commission)
requested CEIOPS to provide, by March 2010, fully consulted upon
final advice on Level 2 implementing measures in respect of the
general criteria to be used to assess third country equivalence
under the Solvency II Directive.
In a second phase, the
Commission will invite CEIOPS to provide advice on individual
country assessments.
1.2. This submission provides advice
for the Level 2 implementing measures
referred to in Articles 172 (reinsurance supervision – Chapter
I), 227 (group solvency calculations – Chapter II) and 260
(group supervision - Chapter III) of the Solvency II Directive.
Where there are common elements between the three
articles (e.g. notably in respect of supervisory cooperation,
exchange of information and the supervision of undertaking(s)
financial condition) a consistent approach has been followed.
Each chapter of advice is
designed to stand alone, since third countries can be assessed
separately in respect of particular articles.
For
example, the European Commission may
decide to assess a third country only for reinsurance
equivalence but not for group equivalence.
1.3.
The Advice identifies the key supervisory
principles encapsulated in the Solvency II Directive and the
objectives each supervisory principle seeks to achieve.
In order to be considered equivalent, a third country
regime will have to meet EACH of the
applicable principles and objectives.
For each
principle and objective the ‘indicators’
of equivalence are also outlined - namely, those factors which
provide guidance in determining whether the relevant principles
and objectives are achieved.
It should be noted
that when assessing a particular principle
and objective, every indicator does NOT necessarily need to be
fulfilled in order for principle and objective to be considered
observed.
This approach is similar to that used
by CEIOPS in assessing the equivalence of third country regimes
under Directive 2005/68/EC (Reinsurance Directive).
1.4.
Equivalence assessments will aim to ensure that the third
country regulatory and supervisory regimes provide a
similar level of policyholder/beneficiary
protection as the one provided under the Solvency II
Directive.
This stands as an overarching principle of
CEIOPS’ advice i.e. it must be met by the third country in
relation to each of the above mentioned areas (reinsurance
supervision, group solvency calculations and group supervision)
for which equivalence is being assessed.
1.5. All three
equivalence assessments incorporate an indicator relating to
internal models.
CEIOPS does not
consider that the existence of an internal models regime is a
prerequisite to a positive equivalence determination under any
of the relevant Articles of the Solvency II Directive.
However,
where an internal models regime exists, and is part of the
fabric of supervision within a third country, then the internal
models regime needs to be equivalent to that established under
the Solvency II Directive.
1.6. The Level 1 text
sets out a primary objective in requiring an economic approach
to valuation of assets and liabilities under Article 75 whilst
including in the recitals a secondary objective of ensuring that
solvency valuation rules to the ex-tent possible should be
compatible with international accounting developments.
This will result in similar valuation
infrastructure for both accounting and solvency purposes,
thereby limiting the administrative burden on (re)insurance
undertakings.
Nevertheless, depending on the
development of international accounting standards, CEIOPS
recognises that adjustments to accounting standards may be
needed for an “economic approach”.
1.7. The current
advice takes into account and makes use of all relevant CEIOPS
advice for Solvency II Level 2 Implementing Measures, as already
delivered to the European Commission.
At the same time, this
advice also takes into account further
guidance received from the European Commission on technical
issues in March 20103.
This guidance has not
required CEIOPS to change its advice on equivalence.
1.8.
CEIOPS is aware that the European Commission may also have to
take into account the final Level 2 text when finalising the
equivalence implementing measures to ensure consistency.
Assessment methodology
1.9. The
annex to the advice provides a high level outline of the
methodology to be used in equivalence assessments. CEIOPS will
further develop this methodology in Level 3 guidance which will
be subject to consultation.
The methodology will allow
for available assessments of other parties (e.g. IAIS, IMF,
OECD, World Bank) to be taken into account, but such assessments
cannot be taken as determinative of equivalence under the
relevant articles of Solvency II.
2.
Chapter I: Equivalence under art. 172
2.1. Background and scope:
2.1.1. Article 172 (1) of the Solvency II Directive requires
the Commission to adopt implementing measures specifying the
criteria to assess the equivalence of third country solvency
regimes with regard to reinsurance activities of undertakings
with their head office in the third country.
2.1.2. Based
on the criteria and according to Article 172 (2) of the Solvency
II Directive, the Commission may decide, in accordance with
procedure in Article 301 (2) of the Solvency II Directive,
whether a solvency regime of a third-country, applied to
reinsurance activities of undertakings with their head office in
that third-country, is equivalent to the regime laid down in
Title I of the Solvency II Directive.
2.1.3. In case of a
positive equivalence determination Member States:
-
Are
required to treat reinsurance contracts concluded with
undertakings having their head office in the third country whose
regime has been deemed equivalent, in the same manner as
reinsurance contracts concluded with an undertaking which is
authorised under the Solvency II Directive (Article 172 (3));
- Cannot require pledging of assets to cover unearned premiums
and outstanding claims provisions (Article 173); and
- Shall not require the localisation within the Community of
assets held to cover the technical provisions covering risks
situated in the Community, nor assets representing reinsurance
recoverables (Article 134).
However, this does not
constrain the terms of reinsurance contracts as agreed between
contracting parties.
2.1.4. The Commission may also
submit proposals to the Council for the negotiation of
agreements with one or more third countries regarding the means
of exercising reinsurance supervision according to Article
175 (1) of the Solvency II Directive.
The text is
largely
consistent with article 50 of the Reinsurance Directive and
provides for the Council to enter into agreements with third
countries, based on the condition of equivalence of prudential
regulation of reinsurance undertakings in the country concerned.
Therefore, the criteria developed in respect of Article
172 (1) and the results of any equivalence assessments under
Article 172 (3), will also be relevant for a proposal by the
Commission under Article 175.
Such agreements shall, in
particular, seek to ensure:
-
Market access for reinsurance
undertakings headquartered in the territory of each party to the
agreement;
- Mutual recognition of supervisory rules and
practices on reinsurance; and
- That the competent
authorities involved are able to obtain information necessary
for the supervision of reinsurance undertakings.
The
Commission is required to examine the outcome of the
negotiations with the assistance of the European Insurance and
Occupational Pensions Committee (EIOPC).
2.1.5. Subject
to article 174 (which prohibits Member States from treating
third country reinsurance undertakings more favourably than
reinsurance undertakings which have their head office in a
Member State), in the absence of an equivalence decision
(art.172) by the Commission, the treatment of reinsurance
contracts with insurance companies with their head office in a
third country remains a matter for each Member State.
The Solvency II Directive does not preclude Member States from
undertaking an assessment of third country equivalence, applying
the criteria adopted by the Commission under article 174(1),
provided there have been no prior equivalence decision by the
Commission in respect of the third country in question.
However, CEIOPS may consider providing L3 guidance on this
matter in order to enhance convergence between Member States
equivalence assessment practices.
2.1.6. CEIOPS notes
that there is a significant difference between the scope of
Article 172 of the Solvency II Directive and Article 49 of the
Reinsurance Directive.
Article 49 refers only to reinsurance
undertakings while Article 172 refers to reinsurance activities
of undertakings.
The interpretation of the wording leads
to the conclusion that Article 172 also includes the solvency
assessment of insurance undertakings which write reinsurance
business (i.e. mixed insurers.).
2.1.7. This Chapter
provides advice on Level 2 implementing measures as referred to
in Article 172 of the Solvency II Directive. Article 172 refers
to the solvency regime set out in Title I. This includes
Articles 1 to 177 of the Directive.
The scope of this
advice therefore includes elements related to
- Assessment
of the Authorisation Process (Articles 14 to 24);
- Expertise and capacity of the Supervisory Authority (Articles 27
to 39);
- Conditions governing business (Articles 40. to
72);
- Requirements of Pursuing Life and Non-Life
activities (Articles 73 to 74);
- Valuation of assets and
liabilities, technical provisions, own funds, solvency capital
requirements, minimum capital requirements and investment rules
(Articles 75 to 135);
Action against (re)insurance
undertakings in difficulty or in an irregular situation
(Articles 136-144) and
- Reinsurance (Articles 172-177).
2.1.8. Special Purpose Vehicles are excluded from the scope of
this Chapter, since Article 172 only refers to a solvency regime
applicable to insurance and reinsurance undertakings.
Furthermore article 211 covering Special Purpose Vehicles is not
within Title I.
2.1.9. Requirements regarding the right
of establishment and freedom to provide services (Articles 145
to 161) are relevant only to EU insurance undertakings.
2.1.10. Articles 162 to 171 refer only to direct life and
non-life insurance business according to the first subparagraph
of Article 2(1) and are therefore not considered.
2.2.
Extract from Level 1 text:
2.2.1. Recital 89
(89) In
order to take account of the international aspects of
reinsurance, provision should be made to enable the conclusion
of international agreements with a third country aimed at
defining the means of supervision over reinsurance entities
which conduct business in the territory of each contracting
party.
Moreover, a flexible procedure should be provided
for to make it possible to assess prudential equivalence with
third countries on a Community basis, so as to improve
liberalisation of reinsurance services in third countries, be it
through establishment or cross-border provision of services.
2.2.2. Article 172
1. The Commission shall adopt
implementing measures specifying the criteria to assess whether
the solvency regime of a third-country applied to re-insurance
activities of undertakings with their head office in that
third-country is equivalent to that laid down in Title I.
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 301(3).
2. The Commission may, in
accordance with the regulatory procedure referred to in Article
301(2) and taking into account the criteria adopted in
accordance with paragraph 1, decide whether the solvency regime
of a third country applied to reinsurance activities of
undertakings with their head office in that third country is
equivalent to that laid down in Title I.
Those decisions
shall be regularly reviewed.
3. Where in accordance with
paragraph 2 the solvency regime of a third country has been
deemed to be equivalent to that laid down in this Directive,
reinsurance contracts concluded with undertakings having
their head office in that third country shall be treated in the
same manner as reinsurance contracts concluded with an
undertaking which is undertakings authorised in accordance with
this Directive.
2.2.3. Article 173
Member States shall
not retain or introduce for the establishment of technical
provisions a system with gross reserving which requires pledging
of assets to cover unearned premiums and outstanding claims
provisions where the reinsurer is a third-country insurance or
reinsurance undertaking, situated in a country whose solvency
regime is deemed to be equivalent to that laid down in this
Directive in accordance with Article 172.
2.2.4. Article
174
A Member State shall not apply to third-country
reinsurance undertakings takingup or pursuing reinsurance
activity in its territory provisions which result in a more
favourable treatment than that granted to reinsurance
undertakings which have their head office in that Member State.
2.2.5. Article 175
1. The Commission may submit proposals
to the Council for the negotiation of agreements with one or
more third countries regarding the means of exercising
supervision over the following:
(a)
Third country
reinsurance undertakings which conduct reinsurance business in
the Community;
(b) Community reinsurance undertakings
which conduct reinsurance business in the territory of a third
country.
2. The agreements referred to in paragraph 1
shall in particular seek to ensure, under conditions of
equivalence of prudential regulation, effective market access
for reinsurance undertakings in the territory of each
contracting party and provide for mutual recognition of
supervisory rules and practices on reinsurance.
They
shall also seek to ensure the following:
(a) That the
supervisory authorities of the Member States are able to obtain
the information necessary for the supervision of reinsurance
undertakings which have their head offices situated in the
Community and conduct business in the territory of third
countries concerned;
(b) That the supervisory authorities
of third countries are able to obtain the information necessary
for the supervision of reinsurance undertakings which have their
head offices situated within their territories and conduct
business in the Community.
3. Without prejudice to
Article 300(1) and (2) of the Treaty, the Commission shall with
the assistance of the European Insurance and Occupational
Pensions Committee examine the outcome of the negotiations
referred to in paragraph 1 of this Article and the resulting
situation.
2.3 Advice
Background
2.3.1. When
assessing a third country supervisory system against the
criteria mentioned below, the main question shall be whether the
supervisory system of the third country provides a level of
protection of policyholders and beneficiaries equivalent to that
applicable under Title I.
Account should also be taken
of whether the supervisory system also contributes to financial
stability and a fair and stable market.
2.3.2.
The recent
financial crisis has highlighted the need for co-ordination and
proper exchange and use of information between supervisory
authorities involved in the supervision of reinsurance
undertakings.
Reinsurance business is a global business, and in
order to be considered equivalent, third country supervisory
authorities must be willing and able to exchange confidential
information with supervisory authorities within the European
Union (EU) / European Economic Area (EEA), under conditions of
professional secrecy.
2.3.3. The advice identifies the
key supervisory principles encapsulated in the Solvency II
Directive and the objectives each supervisory principle seeks to
achieve.
It is against these principles and objectives
that the third country regime shall be assessed.
For each
principle and objective the ‘indicators’ of equivalence are also
outlined - namely, those factors which provide guidance in
determining whether the relevant principles and objectives are
achieved.
2.3.4. In some third countries, there exist
different supervisory regimes applied to reinsurance activities
for different classes of undertakings.
This could cause a
situation where the solvency system for a class of undertakings
could be deemed equivalent to that laid down under Title 1,
whereas the solvency regime for other classes of undertakings
is not equivalent.
2.3.5. In the assessment of third
country supervisory regimes, consideration should be given to
the adequacy of third country practice in applying the
proportionality principle.
CEIOPS considers that the
existence of a proportionality principle in the application of
regulatory provisions in third country jurisdictions is
contingent upon the nature, scale and complexity of the risks
inherent in the business and is, in itself, neither an obstacle
nor a prerequisite to the recognition of equivalence.
2.3.6. Furthermore CEIOPS also considers that an appropriate
System of Governance, in particular an appropriate risk
management system, contains policies regarding investments
and the investment process, too.
Requirements regarding
investments are mentioned in Chapter VI, Section 6 of the
Solvency II Directive and therefore covered under Principle no.
5 – Solvency Assessment.
CEIOPS’ advice
2.3.7. In
order to be deemed equivalent under the provisions of Article
172, CEIOPS considers that a third country regime will have to
meet each of the following principles and objectives.
For each
principle and objective the ‘indicators’ of equivalence are also
outlined - namely, those factors which provide guidance in
determining whether the relevant principles and objectives are
achieved.
It should be noted that
when assessing a
particular principle and objective, every indicator does not
necessarily need to be fulfilled in order for principle and
objective to be considered observed.
2.3.8. (Re)insurance
undertakings should be subject to a supervisory regime that
enables them to absorb significant losses and that gives
reasonable assurance to policy holders and beneficiaries that
payments will be made as they fall due.
2.3.9. In the
assessment of third country supervisory regimes, consideration
should be given to the adequacy of third country practice in
applying the proportionality principle based on the nature,
scale and complexity of the risk inherent in the business.
However, the proportionality principle does not apply to the
professional secrecy provisions in principle 6.
Principle
no. 1 – Powers and responsibilities of the supervisory authority
2.3.10. Objective -
Supervisory Authorities must be provided
with the necessary means and have the relevant expertise,
capacity and mandate to achieve the main objectives of
supervision, namely the protection of policyholders and
beneficiaries regardless of their nationality or residence.
They have to have the resources to fulfil their objectives
which include in particular financial and human resources.
2.3.11. Furthermore the supervisory authority must be
fully
empowered to enable the effective carrying out of the
supervisory authority’s responsibilities.
The supervisory
authority must have a range of actions available, based on
supervisory law, in order to apply appropriate enforcement or
sanctions where problems involving a licensed insurer or
reinsurer are identified.
Its measures have to be
enforced, if needed, through judicial channels.
2.3.12.
Articles – 27, 31, 34 - 36, 51, 62, Recital 17-18,
2.3.13.
Indicator - The 3rd country supervisory authority should be
/have:
- A legal basis specifying supervisory
responsibilities and enforcement powers
- Freedom from
undue political, governmental and industry interference in the
performance of supervisory responsibilities
- Transparency
of supervisory processes / procedures
- Adequate financial
and non-financial (e.g. sufficient numbers of appropriately
skilled staff) resources
- Appropriate protection from
being liable for actions taken in good faith
2.3.14.
Indicator - Appropriate powers to take preventative and
corrective measures to ensure that insurance and reinsurance
undertakings comply with the applicable laws, regulations and
administrative provisions – as indicated below.
- Ability
to ensure compliance on a continuous basis with laws,
regulations and administrative provisions (including through
onsite inspections) including measures to prevent/penalise
further infringements including preventing the conclusion of new
contracts
- Communication of concerns , including those
relating to the undertaking’s financial position
-
Obligation on the (re)insurer to respond to concerns raised by
the supervisor.
- Ability of supervisory authority to
obtain all information necessary to conduct the supervision of
the undertaking
2.3.15. Indicator - Existence/extent of
powers in respect of Financial supervision, verification of:
- System of governance
- State of solvency and financial
condition of undertaking
- Establishment and increase of
technical provisions and covering assets
- Administrative/accounting procedures
- Internal controls
(including those applied to ensure that data received from
cedants are reliable and timely)
2.3.16. Indicator -
Existence/extent of provisions in respect of - Information
obtainable from undertaking i.e. Accounting, prudential,
statistical information:
- Annual Report on the solvency
and financial condition of the undertaking
- Annual accounts
(covering all operations, financial situation and solvency)
- Returns/statistical documents
-
Information regarding
contracts held with intermediaries
2.3.17. Indicator -
Qualifying holdings: Existence of powers in respect of:
A.
Persons (natural/legal) whose actual/proposed qualifying holding
may operate against prudent/sound management.
Measures may
consist of:
- injunctions
- penalties against
directors/managers
- suspension of voting rights
attaching to shares held by relevant shareholders/members or
other instruments
- nullity of votes cast / possibility
of annulment
B. Qualifying holding acquired despite
opposition of supervisory authority.
Measures should
consist of:
- suspension of voting rights
-
nullity of votes cast / possibility of annulment
2.3.18.
Indicator - Undertakings in difficulties
- Prohibit
disposal of assets
- Recovery plan, finance scheme
-
Reestablishment of the level of own funds, reduction of risk
profile
- Downward revaluations
- Withdrawal of
authorisation
Measures relating to directors, managers,
controllers and other relevant persons
2.3.19. Indicator
- Enforcement
The supervisory authority should have the
ability to cooperate with other authorities/bodies in respect of
enforcement action
Principle no. 2 - Authorisation
Requirements
2.3.20. Objective –
To protect
policyholders’ interest the taking up of reinsurance business
shall be subject to prior authorisation to ensure the insurance
and reinsurance undertakings satisfy basic standards (which are
clear, objective and accessible), prior to becoming authorised
to undertake regulated activities and on a continuous basis
thereafter.
2.3.21. Articles – 14 – 26, 41-50
2.3.22.
Indicator - Existence of standards in respect of - Legal Entity:
- Legal form
- Head office of the undertaking to be
situated in the same country as its registered office
Articles of Association
2.3.23. Indicator - Existence of
standards in respect of – Operations:
- Limitation to
reinsurance and related operations for pure reinsurance
undertakings which may include, for example, a holding company
function
- Limitation to the business of insurance and
operations arising directly there from for insurance
undertakings.
- Scheme of operations (including, for the
first three years, a forecast balance sheet, estimates regarding
but not limited to: future Solvency Capital Requirements,
Minimum Capital Requirements, the financial recourses intended
to cover technical provisions and capital requirements.)
-
Financial resources to cover set up costs
- Basic own fund
items constituting the absolute floor of the minimum capital
requirements
- Comply with the system of governance
referred to Principle 3
2.3.24. Indicator - Existence of
standards in respect of - Provision of information on
Shareholders/Members:
- Identity of shareholders/members
with qualifying holdings; and
- Amount of holdings
- Assessment of reputation and financial soundness of the owner
and acquirer
2.3.25. Indicator -
Existence of standards
in respect of - Close links:
- Identification of close
links. (i.e. a situation in which two or more natural or legal
persons are linked by control or participation, or are
permanently linked to one and the same person by a control
relationship )
- Monitoring of close links to ensure they
do not prevent the effective exercise of supervisory powers over
the authorised undertaking.
2.3.26. Indicator - Existence
of standards in respect of - Refusal/withdrawal of
authorisation:
- Legally possible
-
Possible due to
qualifications of shareholders/members; and
- Where close
links prevent effective supervision
Principle no. 3 -
System of Governance
2.3.27. Objective:
The Supervisory
Regime shall require an effective system of governance for
(re)insurance undertakings which provides for a sound and
prudent management of the reinsurance business.
In
particular, an adequate organisational structure with clear
responsibilities, fit and proper management and an effective
system of ensuring the transmission of information should be an
integral part of the system.
2.3.28.
The establishment
and maintenance of adequate risk management, compliance,
internal audit and actuarial functions is expected.
The
different tasks of an appropriate risk management and internal
control system should be regulated, and subject to regular
internal review.
2.3.29. The financial strength of a
(re)insurance undertaking is one of the main reasons for
policyholders closing a contract with that undertaking.
Therefore transparency of this issue is a significant aim and an
important part of a prudent supervisory system. (Re)insurance
undertakings shall be required to disclose publicly a report of
their financial performance.
2.3.30. Articles: 41-49, 51,
72, 132
2.3.31. Indicator - General Requirements and Risk
Management
- Effective system of governance (including but
not limited to transparent organisational structure, effective
system for transmission of information)
- Requirements
relevant to the fitness (for example appropriate professional
qualification, knowledge and experience) and propriety ( for
example good repute and integrity) of management and key
function holders
- Effective and well integrated Risk
Management System to identify measure, monitor, manage and
report (on a continuous basis) the risks to which the
undertaking is or could be exposed (on an individual and
aggregated level), and the amount of own funds necessary to
cover them (comparable to an own risk and solvency assessment
- Sound liquidity management policies which cover short and long
term considerations and include stress test and scenario
analyses
- Objective and independent Internal Audit function
with a direct reporting line to the administrative,
management or supervisory body
- Adequate internal control
mechanisms
- Sound written administrative/accounting procedures
-
Contingency plans
2.3.32. Indicator - Actuarial Function
- Actuarial function with knowledge of actuarial and financial
mathematics appropriate to the nature, scale and complexity of
the risk inherent in the (re)insurance business.
The actuarial
function may be fulfilled in any suitable manner, provided that
adequate standards are met.
2.3.33. Indicator -
Outsourcing
- Continuous supervision of outsourced functions or
activities (meeting of obligations shall not be affected)
2.3.34. Indicator - Compliance
- Compliance Function in place
which provides the administrative, management or supervisory
body advice on compliance with law, regulations and
administrative provisions including an assessment of the
possible
impact of any changes in the legal environment and
the identification and assessment of compliance risks
2.3.35. Indicator -
Deterioration of financial position
-
Identification of deteriorating financial conditions and
remediation of deteriorating with appropriate monitoring
tools in place
2.3.36. Indicator - Auditors' duty to report:
- Breach of laws, regulations, administrative provisions
-
Issues
which may affect the continuous functioning of the undertaking
- Refusal (or reservations) in respect of certification of
accounts
- Non compliance with Solvency and Minimum Capital
Requirements
2.3.37. Indicator:
Existence/extent of provisions in respect of - Public disclosure
of report(s) on solvency and financial conditions at least on an
annual basis with a description of:
-
The business and
performance
- System of governance,
- Risk exposure,
concentration, mitigation and sensitivity,
- Assets,
- Technical provisions, other liabilities and
- Capital
management
Principle no. 4 - Business Change Assessment
2.3.38. Objective –
To ensure the acceptability of proposed
changes to the business from an operational, management and
supervisory perspective.
2.3.39. Articles – 39, 42, 49,
57-63,
2.3.40. Indicator - Existence/extent of provisions in
respect of – Acquisitions:
-
Notification of intention to hold
or increase directly or indirectly a qualifying holding
-
Right of supervisory authority to oppose proposed acquisition
-
Existence of thresholds prompting notification
- Possibility
for assessment of acquisition by financial undertakings to be
subject to prior consultation
2.3.41. Indicator -
Existence/extent of provisions in respect of - Disposals
-
Notification of intention to dispose directly/indirectly of a
qualifying holding
- Thresholds prompting notification
2.3.42. Indicator -
Existence/extent of provisions in respect of
- Information obtainable from undertaking
- Thresholds
prompting notification of acquisitions/disposals
- Regular
notification (e.g. annual) of qualifying holdings, including
size
2.3.43. Indicator - Existence/extent of provisions in
respect of - Outsourcing
- Notification prior to outsourcing of
critical or important functions or activities as well as
material subsequent developments
2.3.44. Indicator -
Existence/extent of provisions in respect of - Ongoing
disclosure of relevant information (Disclosure of information,
including information in respect of):
- Portfolio transfers
or transfer of individual contracts (e.g. in the context of
reinsurance contracts);
- Changes to Board /senior management;
and
- Scheme of operation
Principle no. 5 –Solvency Assessment:
2.3.45. Objective:
The
supervisory regime shall ensure that reinsurers maintain
adequate financial resources in order to prevent disorderly
failure, and shall ensure that the assessment of the
financial position of the (re)insurance undertaking is based
on sound economic principles.
2.3.46. (Re)insurance
undertakings shall establish technical provisions (TP) with
respect to all (re)insurance obligations that are calculated in
a way that enables them to meet their (re)insurance
obligations towards the ceding
undertaking.
Assets covering
technical provisions should be invested in the best interest
of policyholders and beneficiaries, and undertakings should
only be allowed to invest in assets and instruments where the
risks can be
properly identified, measured, monitored,
managed and controlled.
2.3.47. Capital requirements should
be based on sound economic principles and reflect a level of
eligible own funds of sufficient quality that insurance and
reinsurance undertakings are able to absorb significant losses
and gives
reasonable assurance to policyholders and
beneficiaries that payments will be made as they fall due.
Capital requirements are covered by own funds of sufficient
quality and are based on a prospective calculation to ensure
accurate and timely intervention by supervisors.
2.3.48.
Articles – 51, 53-55, 72, 76, 77-135
2.3.49. Indicator -
Existence/extent of provisions in respect of - Financial
supervision
- Communication of concerns, including those
relating to the undertaking’s financial position
-
Obligation on undertaking to respond to concerns raised
2.3.50. Indicator -
Existence/extent of provisions in respect of
- Valuation of assets and liabilities
- The valuation of
assets and liabilities should be based on an economic
valuation of the whole balance sheet.
- Assets and liabilities
should be valued at the amount for which they could be
exchanged between knowledgeable willing parties in an arm’s
length transaction.
- Valuation standards for supervisory
purposes should be consistent with international accounting
standards, to the extent possible
2.3.51. Indicator -
Existence/extent of provisions in respect of - Technical
Provisions
- TP should be established in respect of all
(re)insurance obligations and aim to capture all expected
risks related to (re)insurance obligations of the
undertaking.
- TP should be calculated in a prudent, reliable
and objective manner.
- The level of TP should be the
amount a third country (re)insurance undertaking would have
to pay if it transferred or settled its contractual rights
and obligations immediately to another undertaking/
knowledgeable willing parties in an arm’s length transaction.
-
The valuation of TP should be market consistent and make use, to
the extent possible, of and be consistent with information
provided by financial markets and generally available
information on underwriting risks.
- Segmentation of the
reinsurance obligation into homogenous risk group, and as a
minimum by lines of business should be carried out in order
to achieve an accurate valuation of reinsurance obligations.
-
Processes and procedures should exist to ensure the
appropriateness, completeness and accuracy of the data used
in the calculation of TP.
- The supervisor should be able to
require the undertaking to raise the amount of technical
provisions if they do not comply with the requirements
2.3.52.
Indicator - Own funds
- Own funds should be classified
in accordance with their ability to absorb losses in the case
of winding-up and on a going concern basis.
- The highest
quality capital should be available to absorb losses in a going
concern and in case of a winding up, with additional
requirements of sufficient duration of the own fund item,
absence of incentives to redeem,
absence of mandatory
servicing costs and absence of encumbrances.
- A distinction
should be made between own funds on the balance sheet and
off-balance sheet items8 (for example guarantees).
- According
to their classification, own funds are eligible to cover
partially or fully (for the best quality own funds) of the
capital requirements.
- Quantitative limits should apply to the
own funds to ensure the quality of own funds covering the
capital requirements.
In the absence of quantitative limits
other supervisory requirements should ensure the high quality
of own funds.
2.3.53. Indicator - Existence/extent of
provisions in respect of - Capital Requirements
- Capital
requirements should aim at measuring all quantifiable unexpected
risks of the undertaking.
Where a significant risk is not
captured in the capital requirements, some mechanism should
be applied to
guarantee that capital requirements adequately
reflect such risk.
- There is a capital requirement that
reflects a level of own funds that would enable the
undertaking to absorb significant losses and that gives
reasonable assurance to policyholders and beneficiaries that
payments will be made as they fall due.
The requirement should
enable the undertaking at a minimum to withstand a 1 in 200
ruin scenario over a one year period or ensure that
policyholders and beneficiaries receive at least the same
level of protection.
- There should be a minimum level
under which capital requirements should not fall or
supervisory intervention point which equates to a minimum
level of policyholder protection (“supervisory intervention
ladder”).
The supervisory authority should have powers to take
the necessary and appropriate actions against the undertaking
to restore compliance with that requirement.
- Capital
requirements should be calculated at least annually and
monitored on an ongoing basis.
- Appropriate standards
should be in place where capital requirements take into
account the effect of risk mitigation techniques and
diversification effects.
2.3.54. Indicator – Capital
Requirements – Specificities for the assessment of internal
models
- Where the reinsurance undertaking uses a full or a
partial internal model to calculate its capital requirements,
the resulting capital requirements should provide a level of
policyholder protection that is at least comparable to the
level that would be required under local rules if no internal
model is used (i.e. it adequately models the risks to the
undertaking and produces capital requirements with the same
confidence level as the standard approach).
- The regime
shall have a process for the approval of internal models
which includes a requirement for prior approval of the solo
internal model before the undertaking is permitted to use the
model to determine its regulatory capital requirements
- In
order to be equivalent, a regime that includes an internal model
element should include the following requirements for an
internal model to be used to calculate regulatory capital:
A pre-requisite for an adequate risk management system
A use
test
Statistical quality standards
Validation standards
Documentation standards
Calibration standards
Profit and
loss attribution
- Where the reinsurance undertaking uses a
partial internal model to calculate its capital requirements,
the scope of the partial internal model should be clearly
defined and justified to avoid the "cherry picking" of risks.
There should be no ambiguity as to which risks, assets and/or
liabilities are included or excluded from the scope of the
partial internal model.
2.3.55. Indicator - Investments
-
Undertakings should only be allowed to invest in assets and
instruments where the risks can be properly identified,
measured, monitored, managed, controlled and reported and
appropriately taken into account in its solvency needs.
-
Assets held to cover TP should be invested prudently in the best
interest of all policyholders and
beneficiaries.
- All assets shall be invested in such a manner
to ensure the security, quality, liquidity, availability and
profitability of the portfolio as a whole prudent levels of
investments in assets not admitted to trading investment in
derivative instruments possible insofar they contribute to
reduction of risks or facilitate efficient portfolio management
avoid excessive reliance on any one particular asset, issuer or
accumulations of risk; no excessive risk concentration
Principle no. 6 –Supervisory Cooperation, Exchange of
information and Professional Secrecy
2.3.56. Objective –
To ensure co-ordination and proper exchange and use of
information between supervisory authorities involved in the
supervision of (re)insurance undertakings and others, where
relevant.
To ensure that all persons who are working or have
worked for a supervisory authority are bound by the
obligation of professional secrecy, and that information
disclosed to the authority by other supervisory authorities
is subject to guarantees of professional secrecy.
2.3.57.
Articles: 64 – 70
2.3.58. Indicator - Existence and extent of
provisions in respect of -Practical Cooperation
- -
Authorisation/ongoing assessment of compliance with operating
conditions
- Preauthorisation consultation in respect of
undertakings which form part of a cross-border group
- -
Supervisory Activity
- Communication of concerns regarding
the reinsurance undertaking, including those relevant to the
soundness of the undertaking’s financial position, policies
and procedures.
- - Suitability Assessments
- Ability and
willingness to cooperate in respect of the assessment of:
• shareholder suitability; and
• reputation/experience of
directors
- - Cooperation agreements
- Ability to enter into
cooperation agreements (subject to guarantees of professional
secrecy)
- - Crisis situations
- Information sharing
2.3.59. Indicator -
Existence and extent of provisions in
respect of - Exchange of Information with:
- Supervisory
authorities
- Other authorities/bodies/persons/institutions
responsible for, or having
oversight of:
- supervision of financial organisations /markets
-
liquidation/bankruptcy proceedings
- carrying out statutory
audits of accounts
- detection/investigation of breaches of
company law
- Central banks
-
Government administrations
responsible for financial legislation (for reasons of
prudential control)
2.3.60. The existence and extent of
provisions in respect of - Professional Secrecy - Conditions
of obligation:
- Confidential information - identification
-
Legal duty to protect confidential information
- Applicable to
all relevant individuals (i.e. all those who work, have
worked or act(ed) on behalf of the supervisory authority)
-
Ongoing obligation (applicable whilst working/acting on behalf
of supervisory authority and on continuous basis thereafter)
-
Disclosure of confidential information in restricted and clearly
defined circumstances as well as subject to conditions of
professional secrecy
- Use of confidential information only in
the course of supervisory duties:
Compliance monitoring
(including monitoring of technical provisions, solvency
margins, administrative/accounting procedures and internal
controls)
Imposition of penalties
Court
proceedings/appeals
- Consent of Competent Authority where the
confidential information originates from another competent
authority
Prior agreement to the disclosure
Disclosure
is made in accordance with any specified conditions,
including those relating to the purpose of the disclosure and
use of the information.
2.3.61. Indicator - Existence and
extent of provisions in respect of - Professional
Secrecy -
Exceptions to obligation:
Express agreement to disclose/use
Summary/aggregate disclosure (individual undertaking not
identifiable)
Civil/criminal proceedings (where the
undertaking has been declared bankrupt or is being
compulsorily wound up - information must not concern third
parties involved in rescue attempts )
2.3.62. Indicator –
Breach of the obligation of professional secrecy
Provisions
in national law in respect of the breach of professional secrecy
(offences, penalties, enforcement)
3. Chapter II: Equivalence under art. 227
3.1. Background and
Scope
3.1.1. Article 227 of the Solvency II Framework
Directive refers to the group solvency of an undertaking
which is a participating undertaking in a third country
(re)insurance undertaking.
The equivalence assessment applies
solely for the purposes of the deduction & aggregation method
under Article 233 (alternative method for the calculation of
group solvency).
Whereas Article 227 allows a participating
undertaking to aggregate the solo requirements of a related
third country undertaking using the local third country rules
using the deduction & aggregation method, under the default
method in Article 230 (accounting consolidation) related
third country undertakings are consolidated applying the
Solvency II rules.
CEIOPS notes that under Article 220(2), the
group supervisor must consult the other supervisory
authorities concerned and the group itself before deciding to
apply the deduction & aggregation method.
3.1.2. Under
Article 227(1) where the third-country in which that undertaking
has its head office makes it subject to authorisation and
imposes on it a solvency regime at least equivalent
to that
laid down in Title I, Chapter VI, Member States may provide
that the calculation of the group solvency shall take into
account (as regards that undertaking), the Solvency Capital
Requirement and the own funds eligible to satisfy that
requirement, as laid down by the third-country concerned.
Title I, Chapter VI, details the rules on the valuation of
assets and liabilities, technical provisions, own funds,
solvency capital requirement, minimum capital requirement and
investment rules.
3.1.3. The reference in Article 227(1) to
“subject to authorisation and imposes on it a solvency regime
at least equivalent to that laid down in Title I, Chapter VI”,
gives rise to the question of whether the finding of equivalence
must be in respect of both the authorisation standards and
solvency regime of the third country.
The reference in
Article 227(3) to the discretionary obligation on the
Commission to adopt implementing measures specifying the
criteria to assess the equivalence of the solvency regime of
a third country with respect to Title I,
Chapter VI, suggests
that the equivalence of the third country authorisation regime
may be excluded from the scope of the equivalence determination.
3.1.4. The Commission, after consultation of EIOPC, may adopt a
decision as to the equivalence of a third country solvency
regime in respect of Title I, Chapter VI9taking into account
the adopted criteria.
Any such decision, although subject to
regular review, are determinative and would supersede any
existing determinations by the group supervisor.
3.1.5.
In
circumstances where the Commission has not taken a decision on
equivalence, the group supervisor may carry out any
verification of the equivalence of the third country regime
for the purpose of the group solvency calculation on its own
initiative or at the request of the participating undertaking.
The group supervisor is required to consult the other
supervisory authorities concerned and CEIOPS before taking a
decision on equivalence.
Where the Commission has adopted
criteria for the assessment of equivalence, it is anticipated
that these will be utilised by the group supervisor in
any equivalence determination (i.e. in the absence of any
Commission decision).
3.2. Extract from Level 1 text:
3.2.1. Article 234 - Implementing measures
The Commission
shall adopt implementing measures specifying the technical
principles and methods set out in Articles 220 to 229 and the
application of Articles 230 to 233 to ensure uniform
application within the Community.
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
301(3).
3.2.2. Article 227 - Related third-country insurance
and reinsurance undertakings
1. When calculating, in
accordance with Article 233, the group solvency of an insurance
or reinsurance undertaking which is a participating undertaking
in a third-country insurance or reinsurance undertaking, the
latter shall be treated solely for the purposes of that
calculation as a related insurance or reinsurance
undertaking.
However,
where the third-country in which that
undertaking has its head office makes it subject to
authorisation and imposes on it a solvency regime at least
equivalent to that laid down in Title I, Chapter VI, Member
States may provide that the calculation shall take into
account, as regards that undertaking, the Solvency Capital
Requirement and the own funds eligible to satisfy that
requirement as laid down by the third-country concerned.
2. The verification of whether the third-country regime is at
least equivalent shall be carried out by the group
supervisor, at the request of the participating undertaking
or on its own initiative.
In doing so, the group supervisor
shall consult the other supervisory authorities concerned,
and the Committee of European Insurance and Occupational
Pensions Supervisors, before taking a decision on
equivalence.
3. The Commission may adopt implementing
measures specifying the criteria to assess whether the
solvency regime in a third-country is equivalent to that laid
down in Title I, Chapter VI.
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 301(3).
4. …
5. …
3.3 Advice
Background
3.3.1. The equivalence assessment
under Article 227 is limited to the Pillar 1 calculations
laid out in Title I, Chapter VI. This is because the article is
dealing specifically with how the underlying assets and
liabilities of the related third country undertaking should
contribute to the solvency requirements of a group based in
the Community applying the deduction & aggregation method.
Therefore, a key issue for the group supervisor and the other
supervisory authorities concerned is the comparability and
quality of the information on the third country undertaking.
A third country undertaking’s
contribution to the aggregated group solvency requirement
needs to be based on a similar standard to that of an
undertaking in the EEA.
3.3.2. While not explicitly
covered by the implementing measures in Article 227, CEIOPS
considers that the equivalence assessment should take into
account and be consistent with the advice developed in
relation to Article 260 on cooperation and information
sharing between supervisory authorities.
This is to ensure
that the group supervisor is aware of the risks associated with
the third country undertaking, their contribution to group
solvency and the potential impact on policyholders in the
EEA.
3.3.3. CEIOPS considers also that the existence of a
proportionality principle in the application of regulatory
provisions in third country jurisdictions depending on the
nature, scale and complexity of the risks inherent in the
business of all undertakings that are part of the group and
to the cross-border dimension is neither an obstacle nor a
prerequisite to the recognition of equivalence.
3.3.4. The
advice identifies the key supervisory principles encapsulated in
the Solvency II Framework Directive and the objectives each
supervisory principle seeks to achieve.
It is against these
principles and objectives that the third country regime shall
be assessed.
For each principle and objective the ‘indicators’
of equivalence are also outlined - namely, those factors which
provide guidance in determining whether the relevant
principles and objectives are achieved.
CEIOPS’ advice
3.3.5. According to Article 227(1), a related third country
(re)insurance undertaking should be authorised pursuant to
the authorisation rules of the third country supervisory
authority.
3.3.6.
In order to be deemed equivalent under the
provisions of Article 227, CEIOPS considers that a third
country regime will have to meet each of the following
principles and objectives.
For each principle and objective the
‘indicators’ of equivalence are also outlined - namely, those
factors which
provide guidance in determining whether the
relevant principles and objectives are achieved.
It should be
noted that when assessing a particular principle and
objective, every indicator does not necessarily need to be
fulfilled in order for principle and objective to be
considered observed.
3.3.7.
Related third country
(re)insurance undertakings should be subject to a Solvency
Capital Requirement reflecting a level of eligible own funds
that enables them to absorb significant losses and that gives
reasonable assurance to policy holders and beneficiaries that
payments will be made as they fall due.
3.3.8. The
aggregation of related third country (re)insurance undertakings
must result in a group solvency capital requirement that
provides a level of protection at group level ensuring that
the undertaking can, at a minimum,
withstand a 1 in 200 ruin
scenario over a one year period.
The inclusion of related
third country (re)insurance undertakings should also reflect the
requirement that own funds are appropriately distributed in
the group and are available to protect policyholders and
beneficiaries where needed.
3.3.9. In the assessment of third
country supervisory regimes, consideration should be given to
the adequacy of third country practice in applying the proportionality principle based on the nature,
scale and complexity of the
risk inherent in the business.
However, the proportionality principle does not apply to the
professional secrecy provisions in principle 2.
Principle no. 1 – Solvency Assessment
3.3.10. Objective:
The supervisory
regime shall ensure that (re)insurers maintain adequate
financial resources in order to prevent disorderly failure, and
ensure that the assessment of the financial position of the
undertaking is based on sound economic principles.
3.3.11.
(Re)insurance undertakings shall establish technical provisions
(TP) with respect to all (re)insurance obligations that are
calculated in a way that enables them to meet their
(re)insurance obligations towards policyholders and
beneficiaries.
Assets covering technical provisions should be
invested in the best interest of policyholders and
beneficiaries, and undertakings should only be allowed to
invest in assets and instruments where the risks can be properly
identified, measured, monitored, managed and controlled.
3.3.12. Capital requirements should be based on sound economic
principles and reflect a level of eligible own funds of
sufficient quality that insurance and reinsurance
undertakings are able to absorb significant losses and gives
reasonable assurance to policyholders and beneficiaries that
payments will be made as they fall due.
Capital requirements
are covered by own funds of sufficient quality and are based
on a prospective calculation to ensure accurate and timely
intervention by supervisors.
3.3.13. There should be
sufficient information on the constitution of own funds to
ensure that the group supervisor is able to apply the technical
principles to the group solvency assessment (e.g. the
elimination of double use of eligible own funds).
3.3.14.
Articles – 51, 53-55, 72, 76, 77-135, 222
3.3.15. Indicator -
Existence/extent of provisions in respect of - Financial
supervision
- Communication of concerns, including those
relating to the undertaking’s financial position
-
Obligation on undertaking to respond to concerns raised
3.3.16. Indicator -
Valuation of assets and liabilities:
- The
valuation of assets and liabilities should be based on an
economic valuation of the whole balance sheet.
- Assets and
liabilities should be valued at the amount for which they
could be exchanged between knowledgeable willing parties in an
arm’s length transaction.
- Valuation standards for
supervisory purposes should be consistent with international
accounting standards, to the extent possible.
3.3.17.
Indicator - Technical
Provisions
- TP should be
established in respect of all (re)insurance obligations and
aim to capture all expected risks related to (re)insurance
obligations of the undertaking.
- TP should be calculated in
a prudent, reliable and objective manner.
- The level of TP
should be the amount a third country (re)insurance undertaking
would have to pay if it transferred or settled its contractual
rights and obligations immediately to another undertaking/
knowledgeable willing parties in an arm’s length transaction.
-
The valuation of TP should be market consistent and make use, to
the extent possible, of and be consistent with information
provided by financial markets and generally available
information on underwriting risks.
- Segmentation of the
(re)insurance obligation into homogenous risk group, and as a
minimum by lines of business should be carried out in order
to achieve an accurate valuation of (re)insurance obligations.
-
Processes and procedures should exist to ensure the
appropriateness, completeness and accuracy of the data used
in the calculation of TP.
- The supervisor should be able to
require the undertaking to raise the amount of technical
provisions if they do not comply with the requirements
3.3.18. Indicator -
Own funds
- Own funds should be
classified in accordance with their ability to absorb losses
in the case of winding-up and on a going concern basis.
- The
highest quality capital should be available to absorb losses in
a going concern and in case of a winding up, with additional
requirements of sufficient duration of the own fund item,
absence of incentives to redeem,
absence of mandatory
servicing costs and absence of encumbrances.
- A distinction
should be made between own funds on the balance sheet and
off-balance sheet items16 (for example guarantees).
- According
to their classification, own funds are eligible to cover
partially or fully (for the best quality own funds) of the
capital requirements.
- Quantitative limits should apply to the
own funds to ensure the quality of own funds covering the
capital requirements. In the absence of quantitative limits
other supervisory requirements should ensure the
high quality
of own funds.
3.3.19. Indicator - Capital requirements
-
Capital requirements should aim at measuring all quantifiable
unexpected risks of the undertaking.
Where a significant risk
is not captured in the capital requirements, some mechanism
should be applied to
guarantee that capital requirements
adequately reflect such risk.
- There is a capital
requirement that reflects a level of own funds that would
enable the undertaking to absorb significant losses and that
gives reasonable assurance to policyholders and beneficiaries
that payments will be made as they fall due.
The requirement
should enable the undertaking at a minimum to withstand a 1
in 200 ruin scenario over a one year period or ensure that
policyholders and beneficiaries receive at least the same
level of protection.
- There should be
a minimum level under
which capital requirements should not fall or supervisory
intervention point which equates to a minimum level of
policyholder protection (“supervisory intervention ladder”).
The supervisory authority should have powers to take the
necessary and appropriate actions against the undertaking to
restore compliance with that requirement.
- Capital
requirements should be calculated at least annually and
monitored on an ongoing basis.
- Appropriate standards
should be in place where capital requirements take into
account the effect of risk mitigation techniques and
diversification effects.
3.3.20. Indicator – Capital
Requirements – Specificities of assessment of internal models
--
Where the (re)insurance undertaking uses a full or a partial
internal model to calculate its capital requirements, the
resulting capital requirements should provide a level of
policyholder protection that is at least comparable to the
level that would be required under local rules if no internal
model is used (i.e. it adequately models the risks to the
undertaking and produces capital requirements with the same
confidence level as the standard approach).
-- The regime
shall have a process for the approval of internal models
which includes a requirement for prior approval of the solo
internal model before the undertaking is permitted to use the
model to determine its regulatory capital requirements
-- In
order to be equivalent, a regime that includes an internal model
element should include the following requirements for an
internal model to be used to calculate regulatory capital:
- A pre-requisite for an adequate risk management system
- A
use test
- Statistical quality standards
- Validation
standards
- Documentation standards
- Calibration
standards
- Profit and loss attribution
-- Where the
(re)insurance undertaking uses a partial internal model to
calculate its capital requirements, the scope of the partial
internal model should be clearly defined and justified to
avoid the "cherry picking" of risks. There should be no
ambiguity as to which risks, assets and/or liabilities are
included or excluded from the scope of the partial internal
model.
3.3.21. Indicator -
Investments
- Undertakings should only be allowed to invest
in assets and instruments where the risks can be properly
identified, measured, monitored, managed, controlled,
reported and appropriately taken into account in
its solvency
needs.
- Assets held to cover TP should be invested prudently
in the best interest of all policyholders and beneficiaries.
-
All assets shall be invested in such a manner to ensure the
security, quality, liquidity, availability and profitability
of the portfolio as a whole.
- Prudent levels of investments in
assets not admitted to trading.
- Investment in derivative
instruments possible insofar they contribute to reduction of
investment risks or facilitate efficient portfolio management.
-
Avoid excessive reliance on any one particular asset, issuer or
accumulations of risk; no excessive risk concentration
Principle no. 2 –Supervisory Cooperation, Exchange of
information and Professional Secrecy
3.3.22. Objective –
To ensure co-ordination and proper exchange and use of
information between supervisory authorities involved in the
supervision of (re)insurance undertakings and others, where
relevant.
To ensure that all persons who are working or have
worked for a supervisory authority are bound by the
obligation of professional secrecy and that information
disclosed to the authority by other authorities is subject to
guarantees of professional secrecy.
3.3.23. In the context
of Article 227, supervisory cooperation is important, in
particular, to assist the group supervisor to assess the
undertaking’s contribution to the group capital requirement
and the availability (inter alia
transferability and
fungibility) of own funds for the whole group.
3.3.24.
Articles: 64 – 70
3.3.25. Indicator - Existence and extent of
provisions in respect of - Practical Cooperation
--
Authorisation/ongoing assessment of compliance with operating
conditions
- Preauthorisation consultation in respect of
undertakings which form part of a cross-border group
--
Supervisory Activity
- Communication of concerns regarding
the reinsurance undertaking, including those relevant to the
soundness of the undertaking’s financial position, policies
and procedures.
- Communication of information relevant to
the assessment of available group own funds.
-- Suitability
Assessments
- Ability and willingness to cooperate in respect
of the assessment of:
•
shareholder suitability; and
• reputation/experience of
directors
-- Cooperation agreements
- Ability to enter into
cooperation agreements (subject to guarantees of professional
secrecy)
-- Crisis situations
- Information sharing
3.3.26. Indicator -
Existence and extent of provisions in
respect of - Exchange of Information with:
-- Supervisory
authorities
-- Other authorities/bodies/persons/institutions
responsible for, or having
oversight of:
- supervision of
financial organisations /markets
- liquidation/bankruptcy
proceedings
- carrying out statutory audits of accounts
-
detection/investigation of breaches of company law
-- Central
banks
-- Government administrations responsible for financial
legislation (for reasons of prudential control)
3.3.27.
The existence and extent of provisions in respect of -
Professional Secrecy - Conditions of obligation:
-
Confidential information - identification
- Legal duty to
protect confidential information
- Applicable to all relevant
individuals (i.e. all those who work, have worked or act(ed)
on behalf of the supervisory authority)
- Ongoing obligation
(applicable whilst working/acting on behalf of supervisory
authority and on continuous basis thereafter)
- Disclosure of
confidential information in restricted and clearly defined
circumstances as well as subject to conditions of professional
secrecy
Use of confidential information only in the course of
supervisory duties:
Compliance monitoring (including
monitoring of technical provisions, solvency margins,
administrative/accounting procedures and internal controls)
Imposition of penalties
- Court proceedings/appeals
-
Consent of Competent Authority where the confidential
information originates from another competent authority
Prior agreement to the disclosure
Disclosure is made in
accordance with any specified conditions, including those
relating to the purpose of the disclosure and use of the
information.
3.3.28. Indicator -
Existence and extent of provisions in respect of - Professional
Secrecy - Exceptions to obligation:
- Express agreement to
disclose/use
- Summary/aggregate disclosure (individual
undertaking not identifiable)
- Civil/criminal proceedings
(where the undertaking has been declared bankrupt or is being
compulsorily wound up - information must not concern third
parties involved in rescue attempts )
3.3.29. Indicator –
Breach of the obligation of professional secrecy
Provisions
in national law in respect of the breach of professional
secrecy (offences, penalties, enforcement)
4. Chapter
III: Equivalence under art. 260
4.1. Background and scope
4.1.1. This Chapter provides advice for the Level 2 implementing
measures referred to in Article 260 of the Solvency II Level
1 text19 (herein “Level 1 text”).
Article 260 refers to the
assessment of equivalence of third countries’ group supervision.
4.1.2. Group supervision is a fundamental feature of Solvency
II. It is therefore essential to ensure before exempting a
group from that supervision at European level that the group
supervision regime in the jurisdiction where the head of the
group is located is at least equivalent to that under
Solvency II.
4.1.3. Article 261 states that, in the case of
equivalent supervision referred to in Article 260, Member
States shall rely on the equivalent group supervision exercised
by the third-country supervisory authorities.
Articles 247 to
258 on supervisory cooperation apply mutatis mutandis, which
means that EEA supervisors would expect to play a role in the
cooperation arrangements of the third country group supervisor.
This highlights the importance of cooperation arrangements with
third country supervisors to ensure the appropriate level of
supervision of EEA entities.
4.1.4. CEIOPS notes that in the
absence of a determinative decision on equivalence made by
the European Commission, supervisory authorities may come to
different equivalence decisions on the same third country
regime in respect of different groups.
This raises the risk
of inconsistency in the treatment of third country regimes
and the calculation of group solvency in the EEA.
4.1.5. The
technical criteria set out in this chapter below aim at ensuring
consistency in the way group supervision regime equivalence
is assessed, either by the European Commission, or by the
group supervisor where the European Commission has taken no
decision.
4.1.6. The advice adopted identifies the key
supervisory principles encapsulated in the Solvency II
Framework Directive and the objectives each supervisory
principle seeks to achieve.
It is against these principles
and objectives that the third country regime shall be
assessed. The advice also outlines the key ‘indicators’ of
equivalence - namely, those factors which provide guidance in
determining whether the
relevant principles and objectives
are achieved.
4.1.7. The Commission may also submit proposals
to the Council for the negotiation of agreements with one or
more third countries regarding the means of exercising group
supervision according to Article 264 of the Solvency II
Directive.
Such agreements shall, in particular, seek to
ensure that the competent authorities involved are able to
obtain the information necessary for the supervision at the
level of the group of insurance and reinsurance undertakings.
Principles 3 and 7 in the advice below will be particularly
relevant to any assessment in this respect.
The Commission is
required to examine the outcome of the negotiations with the
assistance of the European Insurance and Occupational
Pensions Committee (EIOPC).
4.2. Extract and brief
synopsis from Level 1 text:
4.2.1. Article 260 of the Level 1
text
Parent undertakings outside the Community: verification
of equivalence
1. In the case referred to in point (c) of
Article 213(2), the supervisory authorities concerned shall
verify whether the insurance and reinsurance undertakings,
the parent undertaking of which has its head office outside the
Community, are subject to supervision, by a third-country
supervisory authority, which is equivalent to that provided
for by this Title on the supervision at the level of the
group of insurance and reinsurance undertakings referred to
in points (a) and (b) of Article 213(2).
The verification
shall be carried out by the supervisory authority which would
be the group supervisor if the criteria set out in Article
247(2) were to apply, at the request of the parent
undertaking or of any of the insurance and reinsurance
undertakings authorised in the Community or on its own
initiative, unless the Commission had concluded previously in
respect of the equivalence of the third country concerned.
In
so doing, that supervisory authority shall consult the other
supervisory authorities concerned, and CEIOPS, before taking
a decision.
1a. The Commission may adopt implementing
measures specifying the criteria to assess whether the
prudential regime in a third-country for the supervision of
groups is equivalent to that laid down in this Title.
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 301(3).
2. The Commission may adopt, after
consultation of the European Insurance and Occupational
Pensions Committee and in accordance with the regulatory
procedure referred to in Article 301(2), and taking into account
the criteria adopted in accordance with paragraph 1a, a
decision as to whether the prudential regime for the
supervision of groups in a third-country is equivalent to
that laid down in this Title.
Those decisions shall be
regularly reviewed to take into account any changes to the
prudential regime for the supervision of groups laid down in
this Title and to the prudential regime in the third country for
the supervision
of groups and to any other change in
regulation that may affect the decision on equivalence.
When a decision has been adopted by the Commission, in
accordance with the first subparagraph, in respect of a third
country, that decision shall be recognised as determinative
for the purposes of the verification referred to
in paragraph
1.
4.2.2. Article 261 of the Level 1 text
Parent
undertaking outside the Community: equivalence
1. In the event of equivalent supervision
referred to in Article 260, Member States shall rely on the
equivalent group supervision exercised by the third-country
supervisory authorities, in accordance with paragraph 2.
2.
Articles 247 to 258 shall apply mutatis mutandis to the
cooperation with third-country supervisory authorities.
4.2.3. CEIOPS considers that in order to determine the criteria
to assess the equivalence of group supervision in third
country jurisdictions, it is also necessary to refer the
objectives of group supervision under Solvency II stated in the
recitals of the level 1 text.
The recitals regarding group
supervision are the following ones.
4.2.4. Recital 95
Measures concerning the supervision of insurance and reinsurance
undertakings in a group should enable the authorities
supervising an insurance or reinsurance undertaking to form a
more soundly based judgment of its financial situation.
4.2.5. Recital 104
This Directive reflects an innovative
supervisory model where a key role is assigned to a group
supervisor, whilst recognising and maintaining an important
role for the solo supervisor. The powers and responsibilities of
supervisors are linked with their accountability.
4.2.6.
Recital 105
All policyholders and beneficiaries should
receive equal treatment regardless of their nationality or
place of residence. [..]
4.2.7. Recital 106
It is
necessary to ensure that own funds are appropriately distributed
within the group and are available to protect policyholders
and beneficiaries where needed. To that end insurance and
reinsurance undertakings within a group
should have
sufficient own funds to cover their solvency capital
requirement.
4.2.8. Recital 107
All supervisors involved
in group supervision should be able to understand the
decisions made, in particular where those decisions are made by
the group supervisor.
As soon as it becomes available to one
of the supervisors, the relevant information should therefore
as soon as it becomes available be shared with the other
supervisors, in order for all supervisors to be able to
establish an opinion
based on the same relevant information.
In the event that the supervisors concerned cannot reach an
agreement, qualified advice from the CEIOPS should be sought
to resolve the matter.
4.2.9. Recital 108
The solvency of
a subsidiary insurance or reinsurance undertaking of an
insurance holding company, third-country insurance or
reinsurance undertaking may be affected by the financial
resources of the group of which it is part and by the
distribution of financial resources within that group.
The
supervisory authorities should therefore be provided with the
means of exercising group supervision
and of taking appropriate measures at the level of the insurance
or reinsurance undertaking where its solvency is being or may
be jeopardised.
4.2.10. Recital 111
All insurance and
reinsurance groups subject to group supervision should have a
group supervisor appointed from among the supervisory
authorities involved.
The rights and duties of the group
supervisor should comprise appropriate coordination and
decision-making powers. The authorities involved in the
supervision of insurance and reinsurance undertakings
belonging to the same group should establish coordination
arrangements.
4.2.11. Recital 116
Insurance and
reinsurance undertakings which are part of a group, the head of
which is outside the Community should be subject to equivalent
and appropriate group supervisory arrangements.
It is
therefore necessary to provide for transparency of rules and
exchange of information with third-country authorities in all
relevant circumstances.
In order to ensure a harmonised approach
to the determination and assessment of equivalence of third
country insurance and reinsurance supervision, provision
should be made for the Commission to make a binding decision
regarding the equivalence of third country solvency regimes.
For third countries regarding which no decision has been made by
the Commission the assessment of equivalence should be made
by the group supervisor after consulting with the other
relevant supervisory authorities.
4.2.12. Paragraphs 4.2.13 -
4.2.44 provide a brief synopsis of the main topics and
features covered by articles 213 to 260 that are addressed in
subsequent advice.
The material is intended only as a summary
and does not constitute CEIOPS’ interpretation of the meaning
of the aforementioned articles.
4.2.13. Article 213 ensures
that there is supervision at the level of the group of insurance
and reinsurance undertakings that are part of a group. It also
allows the group supervisor not to carry out the supervision
of risk concentration and intra- group transactions if
already performed under the provisions of the Financial
Conglomerates Directive.
4.2.14. Article 214 determines the
scope of group supervision and the relevant powers of the
supervisory authority to define that scope.
4.2.15. Article
218 states that at least available eligible own funds shall be
sufficient to cover the group Solvency Capital requirement.
It also requires a supervisory review by the group
supervisor.
4.2.16. Article 219
determines the frequency of
group solvency calculation to be carried out and the
requirements to monitor the group SCR. The possibility of
recalculation in case of alteration and on-going calculation
shall be given.
4.2.17. Article 220 details the choice of the
calculation method for the group SCR. The Accounting
Consolidation-based method is the default method.
The group
supervisor shall be able to require the use of the
deduction-aggregation method or a combination of both methods
when the default method is not appropriate.
4.2.18. Article 221 deals with the interpretation of the
concept of the "proportional share" of related undertakings
to be included in the calculation.
This includes the
recognition of solo solvency deficits at group level and
includes an explicit power for the group supervisor to set
the proportional share in some cases (dominant or significant
influence determined by the supervisory authorities and
absence of capital ties).
The absence of capital ties often
refers to mutual undertakings.
4.2.19. Article 222 ensures
there are no double use of own funds and addresses the
eligibility of own funds at group level taking into account
potential availability constraints.
4.2.20. Article 223
ensures that the intra-group creation of capital is eliminated
when calculating group solvency.
4.2.21. Article 224
states that the valuation principles that apply at solo level
also apply at group level. It allows Member States to use the
solvency figures calculated in other Member States.
4.2.22. Article 225 ensures that all related (re)insurance
undertakings are included in the group calculations.
4.2.23. Article 226 accounts for the inclusion of intermediate
insurance holding companies in the group calculations.
4.2.24. Article 227 details the equivalence assessment process
for third country regimes for the purposes of the deduction
and aggregation method.
4.2.25. Article 228 accounts for the
treatment of related credit institutions, investment firms
and financial institutions when calculating group solvency and
allows their inclusion (via methods 1 and 2 described in
Annex 1 of the financial conglomerates directive 2002/87/EC)
unless their deduction is decided by the group supervisor.
4.2.26. Article 229 provides for the possibility to deduct the
book value of a related undertaking if the information
necessary for calculating the group solvency of its
participating undertaking is not available.
4.2.27. Article
230 describes the default method for the group calculations, the
Accounting consolidation-based method, including the minimum
consolidated group SCR.
4.2.28. Article 231 describes the
approval process for a group internal model and the
application of a solo capital add-on in the context of a group
internal model.
The approval process for a group internal
model is covered by the advice in the addendum on
CEIOPS-DOC-28/09 Level 2 Advice on the approval of an internal
model.
4.2.29. Article 232 deals with the application, when
the consolidation method is used, of capital add-ons at group
level. That advice includes the description of issues related
to group specific risks. The setting of a capital add-on at
group level is covered by the advice in the CEIOPS Advice on
capital add-ons (CEIOPS-DOC-49/09).
4.2.30. Article 233
describes the deduction and aggregation method for the group
calculations, including the imposition of a capital add-on to
the aggregated group SCR.
4.2.31. Article 235 ensures that
a group solvency calculation is carried out at the level of
the insurance holding company when relevant.
4.2.32. Article 244 and 245 gives the
responsibility to the group supervisor in cooperation with
the others concerned supervisory authorities to supervise risk
concentration and intra-group transactions and to review the
reporting of those items.
4.2.33. Article 246 accounts for
the existence at group level of sufficient quality of the
governance, including inter alia requirements on internal
control and risk management.
4.2.34. Article 247 requires the
designation of a single authority responsible for exercising
group supervision, the group supervisor.
4.2.35. Article 248
describes the rights and the duties of the group supervisor.
This requirement shall ensure that an efficient supervision
of entities included in the scope of supervision is allowed
and that the supervision will be made in a fruitful
cooperation with other entities concerned.
4.2.36. Article
249 deals with the existence of provisions that ensure that the
authorities concerned (EEA or third country) by the group
supervision will cooperate and exchange information
efficiently in going concern and in crisis situation.
4.2.37.
Article 250 requires that supervisors are able to take
appropriate remedial action to address concerns in relation
to the functioning of the group.
4.2.38. Article 251
describes the coordination mechanisms when the group supervisor
makes requests to others supervisory authorities.
4.2.39.
Article 252 describes the coordination and proper exchange of
information between supervisory authorities involved in the
supervision of a (re)insurance undertaking and either a
credit institution or an investment firm, or both where they
are directly related or have a common participating undertaking.
4.2.40. Article 253 deals with professional secrecy and
confidentiality aspects.
4.2.41. Article 254 requires an
access to information and their verification by supervisory
authorities. The persons included in the group supervision
should be free to exchange information that may be relevant
for the purpose of group supervision and that the supervisory
authority then has access to the necessary information
4.2.42. Article 256 deals with the disclosure of insurance group
relevant information on their group solvency and financial
condition.
4.2.43. Article 257 shall ensure that members of
the administrative or management body of any insurance
holding company have professional qualifications, knowledge
and experience (fit) and are of good repute and integrity
(proper).
4.2.44. Article 258 identifies the supervisory
authority responsibility for requiring the necessary
measures, to ensure that findings are shared so that necessary
measures can be taken and to ensure that supervisory authorities
have enforcement powers towards insurance holding companies
and undertakings.
4.3 Advice
Background
4.3.1. In
general, the overall objective of solo and group supervision is
the adequate protection of policyholders and beneficiaries.
When assessing a third country supervisory system against the
criteria mentioned below, the main question shall be if the supervisory regime of the third country
ensures the protection of policyholders and beneficiaries in
an equivalent manner compared to the solvency regime under
Title III.
Account should also be taken of
whether the
supervisory system also contributes to financial stability
and a fair and stable market.
4.3.2. CEIOPS considers that
in order to determine the criteria to assess the equivalence
of group supervision in third country jurisdictions, it is
necessary to refer to the objectives of group supervision
under Solvency II as stated in the recitals of the level 1
text.
4.3.3. There should be supervision, at the level of the
group, of (re)insurance undertakings which are part of a
group, the parent undertaking of which is a (re)insurance
undertaking or insurance holding company in the third country.
4.3.4. The third country legislation should ensure that the
group supervisor has the necessary powers for determining the
relevant scope of group supervision.
The following example is
extracted from CEIOPS’ advice to the European Commission on
group solvency assessment.
4.3.5. To ensure that
coordination is achieved within the authorities responsible for
the supervision of the group and that there is a clear
responsibility for the exercise of group supervision, only
one single authority shall be responsible for exercising
group supervision.
CEIOPS expects that as an overall principle
the legal requirements for group supervision in third
countries contain a similar concept of a central contact
point as in EEA Member States.
4.3.6. Third countries
supervisory authorities should provide for the supervision at
the level of the group of insurance and reinsurance
undertakings which are part of a group.
4.3.7.
Third
countries supervisory authorities shall be able to assess
relations of control.
4.3.8. The third countries supervisory
authorities shall indicate in which cases the inclusion of an
entity in the scope of group supervision would be inappropriate
or misleading (for example in cases where there are legal
impediments to transfer the necessary information) or when
the entity is of negligible interest for the group
supervision.
4.3.9. A mutual exchange of information is
expected for circumstances where an entity is included or
excluded from the scope of supervision.
4.3.10. CEIOPS
expects that in the third country legislation exists that
prevents double counting and the intra-group creation of
capital when calculating the capital at the level of the
group.
4.3.11. The existence of a tier system for own funds
shall not be a prerequisite for recognising equivalence.
4.3.12. The calculation methods shall lead to a result at least
equivalent to one of the two methods of the Level 1 text
(accounting consolidation-based method, deduction-
aggregation method).
4.3.13. Related credit institutions,
investment firms, financial institutions as private pension
funds shall be included in the group calculation with no
allowance for diversification.
4.3.14. An
adequate system
of governance, risk management and internal controls as well
as a risk oriented reporting system should be in place within
the group and should be assessed on a group wide basis to
enhance the assessment of the solo entities.
Groups shall be
required to disclose publicly a group report on their
solvency and financial position with comparable elements to
those of the Solvency II framework.
4.3.15. Transparency
in respect of the financial strength of a group is a significant
aim and an important part of a prudent supervisory system.
A
non-disclosure is only permitted in relation to information
which would confer a significant undue advantage on
competitors if disclosed, or in relation to which there is a
binding obligation of secrecy or confidentiality.
The group
report on financial performance shall be updated at least in
case of major significant developments as for
example
non-compliance with SCR and lack of realistic recovery plan
within a short timeframe.
4.3.16.
Third country
supervisors should focus on the quality of the overall
effectiveness of the governance system at group level, in
providing for sound and prudent management of the business.
4.3.17. Such a system of governance should encompass
proportionality aspects, sufficiency of means, methods and
powers and a system of assessing risks and capital
requirements.
4.3.18. In this frame
third country supervisor should be able to exercise supervision
especially over risk concentration and intra-group transactions,
taking into account the nature of the relationships between
regulated entities as well as nonregulated entities,
including insurance holding companies and mixed-activity
holding companies.
Appropriate measures shall be taken by the
supervisors concerned where the group’ solvency is or may be
jeopardised.
4.3.19. In case of disagreement and to deal with
any emerging crisis situations, CEIOPS expects that there
should be processes in place for reaching joint agreements
with the third countries authorities.
4.3.20.
Third country
supervisory authorities and EEA supervisory authorities should
cooperate closely. All relevant information should be made
available to any authority concerned, as soon as practicable.
In particular information should be given when the solvency
requirement of an entity within the group / of the group are
not longer complied with.
4.3.21. Consultation between third
country supervisors and EEA supervisors is necessary in order
to be able to take appropriate remedial actions to address
concerns in relation to the functioning of the commonly
supervised group.
Therefore CEIOPS expects that the third
country supervisors as well as the EEA supervisors shall
have general supervisory powers; require insurance and
reinsurance undertakings to submit to the supervisory
authorities the information which is necessary for the purposes
of supervision.
4.3.22. This shall at least include an
assessment of the system of governance applied by the
undertakings, the business they are carrying on, the valuation
principles applied for solvency purposes, the risks faced and
the risk management systems, their capital structure, needs
and management.
4.3.23. Furthermore CEIOPS also considers
that an appropriate System of Governance, in particular an
appropriate risk management system, contains policies
regarding investments and the investment process, too.
Requirements regarding investments are mentioned in Chapter
VI, Section 6 of the Solvency II Framework Directive and
therefore covered under Principle no. 6 – Group Solvency
Assessment.
4.3.24. CEIOPS considers also that the existence
of a proportionality principle in the application of
regulatory provisions in third country jurisdictions depending
on the nature, scale and complexity of the risks inherent in
the business of all undertakings that are part of the group
and to the cross-border dimension is neither an obstacle nor
a prerequisite to the recognition of equivalence.
4.3.25.
CEIOPS has determined 7 principles to recognise equivalence of
third country group supervision regimes.
CEIOPS’ advice
4.3.26. In order to be deemed equivalent under the provisions of
Article 260, CEIOPS considers that a third country regime
will have to meet each of the following principles and
objectives.
For each principle and objective
the ‘indicators’
of equivalence are also outlined - namely, those factors which provide guidance in determining
whether the relevant principles and objectives are achieved.
It should be noted that when assessing a particular principle
and objective, every indicator does not necessarily need to be
fulfilled in order for principle and objective to be
considered observed.
4.3.27. Groups should be subject to a
supervisory regime that enables them to absorb significant
losses and that gives reasonable assurance to policy holders
and beneficiaries of (re)insurance undertakings part of the
group
that payments will be made as they fall due.
4.3.28.
In the assessment of third country supervisory regimes,
consideration should be given to the adequacy of third
country practice in applying the proportionality principle
based on the nature, scale and complexity of the
risk
inherent in the business.
However, the proportionality principle
does not apply to the professional secrecy provisions in
principle 7.
Principle no. 1 – Powers and responsibilities of
a group supervisor
4.3.29. Objective -
Supervisory
Authorities must be provided with the necessary means and
have the relevant expertise, capacity and mandate to achieve
the main objectives of supervision, namely the protection of
policyholders and beneficiaries regardless of their
nationality or residence.
They have to
have the resources to
fulfil their objectives which include in particular financial
and human resources.
4.3.30. Furthermore the supervisory
authority must be fully empowered to enable the effective
carrying out of the supervisory authority’s responsibilities.
The supervisory authority must have a range of actions
available, based on supervisory law, in order to apply
appropriate enforcement or sanctions where problems in
relation with the functioning of the group are identified.
Its measures have to be enforced, if needed, through judicial
channels.
4.3.31. Supervisors of insurers within a group must
be able to form a comprehensive view of the overall group
business strategy, financial position, legal and regulatory
position and the risk exposure of the group as a whole,
which
will enable supervisors to assess and react to the prudential
situation and solvency of the respective insurers within the
group.
4.3.32. Articles – 213, 214, 247, 248, 258
4.3.33.
Indicator - The 3rd country supervisory authority should be /
have:
- A legal basis specifying supervisory responsibilities
and enforcement powers
- Freedom from undue political,
governmental and industry interference in the performance of
supervisory responsibilities
- Transparency of supervisory
processes / procedures
- Adequate financial and non-financial
(e.g. sufficient numbers of appropriately skilled staff)
resources
- Appropriate protection from being liable for
actions taken in good faith
4.3.34.
Indicator - Appropriate powers to take preventative and
corrective measures to ensure that groups comply with the
applicable laws, regulations and administrative provisions –
as indicated below.
- Ability to ensure compliance on a
continuous basis with laws, regulations and administrative
provisions (including through onsite inspections) including
measures to prevent/penalise further infringements including
preventing the conclusion of new contracts
- Communication
of concerns , including those relating to the group’s financial
position
- Obligation on the parent undertaking to respond to
concerns raised by the supervisor.
- Ability of supervisory
authority to obtain all information necessary to conduct the
supervision of the group
4.3.35. Indicator - Existence/extent
of powers in respect of Financial supervision, verification
of:
- System of governance
-
State of solvency and financial
condition of group
- Establishment and increase of technical
provisions and covering assets
- Administrative/accounting
procedures
- Internal controls (including those applied to
ensure that data received from cedents are reliable and
timely)
4.3.36. Indicator - Information obtainable from the
parent undertaking:
Ability of supervisory authority to
obtain information with regard to the group i.e. Accounting,
prudential, statistical information:
- Annual Report on the
solvency and financial condition of the group
- Group annual
accounts (covering all operations, financial situation and
solvency)
- Group returns/statistical documents
4.3.37.
Indicator - Qualifying holdings: Existence of powers in respect
of:
Persons (natural/legal) whose actual/proposed qualifying
holding may operate
against prudent/sound management.
Measures may consist of:
- injunctions
- penalties
against directors/managers
- suspension of voting rights
attaching to shares held by relevant
shareholders/members or
other instruments.
- nullity of votes cast / possibility of
annulment
Qualifying holding acquired despite opposition of
supervisory authority.
Measures should consist of:
-
suspension of voting rights
- nullity of votes cast /
possibility of annulment
4.3.38.
Indicator – Ultimate Parent Undertakings in difficulties
-
Prohibit disposal of assets
- Recovery plan, finance scheme
-
Reestablishment of the level of own funds, reduction of risk
profile
- Downward revaluations
- Withdrawal of authorisation
(if applicable)
Measures relating to directors, managers,
controllers and other relevant
persons
4.3.39. Indicator -
Enforcement
The supervisory authority should have the ability
to cooperate with other authorities/bodies in respect of
enforcement action
Principle no. 2 - Group supervision
4.3.40. Objective:
The supervisory regime should have a
framework for determining which undertakings fall within the
scope of supervision at group level. Nonetheless,
undertakings controlled (through significant or dominant
influence e.g.) by the group shall be included in the scope of
group supervision.
4.3.41. All parts of the group
(including holdings, other financial sectors, offbalance
sheets items) necessary to ensure a proper understanding of the
group and the potential sources of risks within the group have
to be included
within the scope of group supervision.
4.3.42. Indicator -
The scope of group supervision shall be at
least the same as the one of the level 1 text (Article
213.2). Entities for which there is a dominant or significant
influence shall be included in the scope of group
supervision.
4.3.43. Indicator –
There should be a single
identified group supervisor responsible for coordination and
exercising group supervision.
4.3.44. Indicator -
The
relevant EU supervisory authorities concerned shall be
consulted and involved in advance in case the third country
group supervisor finally intends to carry out an inspection
in an (re)insurance undertaking situated in the EEA.
4.3.45. Indicator -
The third country group supervisor has to
inform the supervisory authority concerned in case the entity
has been excluded from the group supervision.
Principle
no. 3 – Necessary provisions and arrangements should be in
place to allow efficient and effective supervision through
corporation and exchange of information among supervisors of the
group.
4.3.46. Objective:
Effective co-ordination and
co-operation procedures, going beyond the simple exchange
of information, are in place to facilitate group supervision
4.3.47. Articles – 248-257
4.3.48. Indicator - Rights and
duties of the third country group supervisor:
The group
supervisor should be the contact person for key questions at
group level and be responsible for:
- The coordination and
dissemination of information;
- Review of the groups
financial position;
- Planning and coordination;
- A
framework for crisis management;
- The assessment of the
application for a group internal model if relevant and take
its decision in consultation with other supervisory
authorities concerned.
4.3.49. Indicator - Establishment and
functioning of cooperation mechanisms:
Non exhaustive list of
criteria for good cooperation to be fulfilled by third
country supervisors:
- Willingness to submit information on
intra-group transactions.
- Exchange of prior information on
decisions that could affect the solvency of the entities
belong to an EEA MS.
- Willingness to allow the transfer of
cash.
- Willingness to change the content of written
coordination arrangements.
- Allowance to EEA MS to
participate in the validation process of group internal
models.
- Willingness to support restrictions on free assets
for supervised entities.
4.3.50. Indicator - Setting up of
cooperation arrangements
A college of supervisors or similar
cooperation arrangements could be established composing a
minima of all relevant authorities for the group supervision
under the following circumstances:
-
Relevance of the
group to overall financial stability;
- Relevance of the
group in specific insurance market;
- Similarity of
supervisory practices;
- The nature and complexity of the
business undertaken by the group.
In case a College of
supervisors or similar cooperation arrangements are
established, the functioning and organisation of these
mechanisms could be based on written arrangements, including
provisions on obligation
to cooperate/exchange of information
and decision-making processes.
The process of the College of
Supervisors or similar cooperation arrangements should strive
to achieve consensus by supervisory authorities.
4.3.51.
Indicator - Decision-making process among supervisory
authorities:
Existence of a mechanism for dispute solving
mechanism in case of disagreement with other relevant
supervisory authorities.
4.3.52. Indicator - Exchange of
information and cooperation between third country supervisors
and EEA supervisors:
The exchange of information and
cooperation between third country supervisors and EEA
supervisors should be performed closely in a cooperative
manner, in going concern circumstances as well as in crisis
situations and shall comprise all relevant information,
especially when the solvency requirement of an entity within
the group / of the group are not longer complied with.
4.3.53. Indicator - Consultation between third country
supervisors and EEA supervisors:
CEIOPS expects that the
third country supervisors as well as the EEA supervisors
shall have general supervisory powers and require insurance
and reinsurance undertakings to submit to the supervisory
authorities the information which is necessary for the
purposes of supervision.
Principle no. 4 – System of
Governance
4.3.54. Objective –
The Supervisory Regime shall
require an effective system of governance across the group
which provides for a sound and prudent management of the
business.
In particular, an adequate organisational structure
with clear responsibilities fit and proper management and an
effective system of ensuring the transmission of information
should be an integral part of the system.
4.3.55. The
establishment and maintenance of adequate risk management,
compliance, nternal audit and actuarial functions is
expected. The different tasks of an appropriate risk
management and group control systems should be regulated, and
subject to regular review.
4.3.56. The financial strength of
a group to which a (re)insurance undertaking belongs to is one of the main reasons for
policyholders closing a contract with that undertaking.
Therefore transparency of this issue is a significant
aim and
an important part of a prudent supervisory system.
Group shall
be required to disclose publicly a report of their financial
performance.
4.3.57. Article – 244, 245, 246, 248, 256, 260
4.3.58. Indicator -
General Requirements and Risk Management
-
Effective system of governance (including but not limited to
transparent organisational structure, effective system for
transmission of information)
- Requirements relevant to the
fitness (for example appropriate professional qualification,
knowledge and experience) and propriety ( for example good
repute and integrity) of for management and key function
holders
-
Effective and well integrated Risk Management System
to identify measure, monitor, manage and report (on a
continuous basis) the risks to which the group is or could be
exposed (on an individual and aggregated level), and the
amount of own funds necessary to cover them (comparable to an
own risk and solvency assessment).
- Sound liquidity management
policies which cover short and long term considerations and
include stress test and scenario analyses. Liquidity
management policies should in particular account for situations
where liquidity is managed at group level.
- Objective and
independent Internal Audit function with a direct reporting
line to the administrative, management or supervisory body
-
Adequate internal control mechanisms
- Sound written
administrative/accounting procedures
- Contingency plans
4.3.59. Indicator -
Actuarial Function
Actuarial function
with knowledge of actuarial and financial mathematics
appropriate to the nature, scale and complexity of the risk
inherent in the business of the group. The actuarial function
may be fulfilled in
any suitable manner, provided that
adequate standards are met.
4.3.60. Indicator - Outsourcing
Supervision of outsourced functions or activities (meeting of
obligations shall not be affected)
4.3.61. Indicator -
Compliance
Compliance Function in place which provides the
administrative, management or supervisory body advice on
compliance with law, regulations and administrative
provisions including an assessment of the possible impact of
any changes in the legal environment and the identification
and assessment of compliance risks
4.3.62. Indicator -
Deterioration of financial position
Identification of
deteriorating financial conditions and remediation of deteriorating with appropriate monitoring tools
in place
4.3.63. Indicator - Auditors' duty to report
Duty
to report:
- breach of laws, regulations, administrative
provisions
- issues which may affect the continuous
functioning of the undertaking
- refusal (or reservations) in
respect of certification of accounts
- non compliance with
Solvency and Minimum Capital Requirements
4.3.64. Indicator:
Existence/extent of provisions in respect of - Public disclosure
of report(s) on solvency and financial conditions at least on an
annual basis with a description of:
the business and
performance
system of governance,
risk exposure,
concentration, mitigation and sensitivity,
assets,
technical provisions, other liabilities
intra-group
transactions and risk concentration and
capital management
Principle no. 5 - Business Change Assessment
4.3.65.
Objective –
To ensure the acceptability of any proposed changes
to the business from an operational, management and
supervisory perspective.
4.3.66. Articles – 57, 61
4.3.67.
Indicator - Existence/extent of provisions in respect of –
Acquisitions:
Notification of intention to hold or increase
directly or indirectly a qualifying holding
Right of
supervisory authority to oppose proposed acquisition
Existence of thresholds prompting notification
Possibility
for assessment of acquisition by financial undertakings to be
subject to prior consultation
4.3.68. Indicator -
Existence/extent of provisions in respect of - Disposals
Notification of intention to dispose directly/indirectly of a
qualifying holding
Thresholds prompting notification
4.3.69. Indicator -
Existence/extent of provisions in respect of
- Information obtainable from undertaking
Thresholds prompting notification of
acquisitions/disposals
Regular notification (e.g. annual) of
qualifying holdings, including size
4.3.70. Indicator -
Existence/extent of provisions in respect of - Outsourcing
Notification prior to outsourcing of critical or important
functions or activities as well as material subsequent
developments
4.3.71. Indicator - Existence/extent of
provisions in respect of - Ongoing disclosure of relevant
information (Disclosure of information, including information
in respect of):
portfolio transfers or transfer of individual
contracts (e.g. in the context of reinsurance contracts);
changes to Board /senior management; and
scheme of operation
Principle no. 6 -
Group solvency assessment
4.3.72.
Objective:
The supervisory regime shall ensure that groups
maintain adequate financial resources in order to prevent
disorderly failure, and shall ensure that the assessment of
the financial position of the group is based on sound
economic principles.
4.3.73. Groups
shall establish technical
provisions (TP) with respect to all (re)insurance obligations
that are calculated in a way that enables them to meet their
(re)insurance obligations towards policyholders and
beneficiaries of (re)insurance undertakings part of the
group.
Assets covering technical provisions should be
invested in the best interest of policyholders and
beneficiaries, and groups should only be allowed to invest in
assets and instruments where the risks can be properly
identified, measured, monitored, managed and controlled.
4.3.74. Capital requirements should be based on sound economic
principles and reflect a level of eligible own funds of
sufficient quality that groups are able to absorb significant
losses and gives reasonable assurance to policyholders
and
beneficiaries of (re)insurance undertakings part of the group
that payments will be made as they fall due.
Capital
requirements are covered by own funds of sufficient quality
and are based on a prospective calculation to ensure accurate
and timely intervention by supervisors.
4.3.75. The
calculation methods of the group capital requirement shall lead
to a result at least equivalent to one of the two methods of
the Level 1 text (consolidation method, aggregation method).
4.3.76. Each undertaking within the group maintains a minimum
level of financial resources, below which it should not fall.
This assessment should also include how non-insurance
undertakings are considered as part of group
supervision and
how contagion risk is dealt with.
4.3.77. Article – 220-233
4.3.78. Indicator -
Existence/extent of provisions in respect of
- Financial supervision
Communication of concerns, including those relating to the
group’s financialposition
Obligation on parent
undertaking to respond to concerns raised
4.3.79. Indicator -
Valuation of assets and liabilities
The valuation of assets
and liabilities should be based on an economic valuation of
the whole balance sheet.
Assets and liabilities should be
valued at the amount for which they could be exchanged
between knowledgeable willing parties in an arm’s length
transaction.
Valuation standards for supervisory purposes
should be consistent with international accounting standards, to
the extent possible
4.3.80. Indicator - Technical Provisions
TP should be established in respect of all
(re)insurance obligations and aim to capture all expected
risks related to (re)insurance obligations of the
undertaking.
TP should be calculated in a prudent, reliable
and objective manner.
The level of TP
should be the amount a
third country (re)insurance undertaking would have to pay if
it transferred or settled its contractual rights and
obligations immediately to another undertaking/ knowledgeable
willing parties in an arm’s length transaction.
The valuation
of TP should be market consistent and make use, to the extent
possible, of and be consistent with information provided by
financial markets and generally available information on
underwriting risks.
Segmentation of the (re)insurance
obligation into homogenous risk group, and as a minimum by
lines of business should be carried out in order to achieve
an accurate valuation of (re)insurance obligations.
Processes
and procedures should exist to ensure the appropriateness,
completeness and accuracy of the data used in the calculation of
TP.
The supervisor should be able to require the undertaking
to raise the amount of technical provisions if they do not
comply with the requirements
4.3.81.
Indicator - Own funds
Own funds should be classified in accordance with their ability
to absorb losses in the case of winding-up and on a going
concern basis.
The highest quality capital should be
available to absorb losses in a going concern and in case of
a winding up, with additional requirements of sufficient
duration of the own fund item, absence of incentives to redeem,
absence of mandatory servicing costs and absence of
encumbrances.
A distinction should be made between own funds
on the balance sheet, and off balance sheet items (for
example guarantees). –
According to their classification,
own funds are eligible to cover partially or fully (for the
best quality own funds) of the capital requirements.
Quantitative limits should apply to the own
funds to ensure the quality of own funds covering the capital
requirements. In the absence of quantitative limits other
supervisory requirements should ensure the
high quality of
own funds.
Double gearing and the intra-group creation of
capital shall be avoided,.
The result of the assessment of
fungibility / transferability issues (e.g. restricted assets)
shall be communicated by the group supervisor.
Solo deficits
shall be fully taken into account at group level unless the
group can prove that its responsibility is limited to its
proportional share of the capital.
4.3.82. Indicator -
Capital requirements
Capital requirements should aim at
measuring all quantifiable unexpected risks of the
undertaking.
Where a significant risk is not captured in the
capital requirements, some mechanism should be applied to
guarantee that capital requirements adequately reflect such
risk.
There is a capital requirement that reflects a level of
own funds that would enable the undertaking to absorb
significant losses and that gives reasonable assurance to
policyholders and beneficiaries that payments will be made as
they fall due.
The requirement should
require an economic
strength from the undertaking comparable to withstanding a 1
in 200 ruin scenario over a one year period or ensure that
policyholders and beneficiaries receive at least the same level
of protection.
There should be a minimum level under which
capital requirements should not fall or supervisory
intervention point which equates to a minimum level of
policyholder protection (“supervisory intervention ladder”).
The supervisory authority should have powers to take the
necessary and appropriate actions against the undertaking to
restore compliance with that requirement.
Group capital
requirements should be calculated at least annually and
monitored on an ongoing basis.
Appropriate standards should
be in place where capital requirements take into account the
effect of risk mitigation techniques and diversification
effects at group level.
In order to reflect the total risks
that the group may face, the group SCR shall also reflect the
risks that arise at the level of the group and that are
specific to the group.
The calculation methods shall lead to
a result at least equivalent to one of the two methods for
groups’ calculations of the level 1 text.
4.3.83. Indicator –
Capital Requirements – Specificities of assessment of
internal models
Where the group uses a full or partial
internal model to calculate its capital requirements, the
requirements should require an economic strength from the
undertakings equivalent to withstanding a 1 in 200 ruin
scenario over a year period.
the
resulting capital requirements should provide a level of
policyholder protection that is at least comparable to the
level that would be required under local rules if no internal
model is used (i.e. it adequately models the risks to the
undertaking and produces capital requirements with the same
confidence level as the standard approach)
The regime shall
have a process for the approval of group internal models
which includes a requirement for prior approval of the group
internal model before the group is permitted to use the model
to determine its regulatory capital requirements
In order
to be equivalent, a regime that includes an internal model
element should include the following requirements for an
internal model to be used to calculate regulatory capital:
- A pre-requisite for an adequate risk management system
- A
use test
- Statistical quality standards
- Validation
standards
- Documentation standards
- Calibration
standards
- Profit and loss attribution
Where the
reinsurance undertaking uses a partial internal model to
calculate its capital requirements, the scope of the partial
internal model should be clearly defined and justified to
avoid the "cherry picking" of risks.
There should be no
ambiguity as to which risks, assets and/or liabilities are
included or excluded from the scope of the partial internal
model.
Consultation of EEA subsidiaries from which risks are
included in the group internal model approved for regulatory
purposes; if any.
Possibility of joint inspection as regards
group internal models.
4.3.84. Indicator - Investments
Undertakings should only be allowed to invest in assets and
instruments where the risks can be properly identified,
measured, monitored, managed, controlled, reported and
appropriately taken into account in its solvency needs.
Assets held to cover TP should be invested prudently in the best
interest of all policyholders and beneficiaries.
All
assets shall be invested in such a manner to ensure the
security, quality, liquidity, availability and profitability
of the portfolio as a whole.
Prudent levels of investments in
assets not admitted to trading.
Investment in derivative
instruments possible insofar they contribute to reduction of
investment risks or facilitate efficient portfolio management.
Avoid excessive reliance on any one particular asset, issuer or
accumulations of risk; no excessive risk concentration.
4.3.85. Indicator -
Floor to
the group SCR
Financial regulated entities in the group should
be subject to a minimum capital requirement or comparable
intervention point which equates to a minimum level of
policyholder protection.
In the result of
ongoing
non-compliance the supervisory authority should have powers
to take the necessary actions against the undertaking to restore
compliance with that requirement.
This may include, for
example, a withdrawal of the firm’s permission to undertake
regulated activities.
The group SCR should therefore not be
below the sum of the solo minimum capital requirements of
each undertakings of the group.
Principle no. 7 –Supervisory
Cooperation, Exchange of information and Professional
Secrecy.
4.3.86. Objective –
To ensure co-ordination and
proper exchange and use of information between supervisory
authorities involved in the supervision of groups,
(re)insurance undertakings and others, where relevant.
To ensure
that all persons who are working or have worked for a
supervisory authority are bound by the obligation of
professional secrecy and that information disclosed to the
authority by other supervisory authorities is subject
to
guarantees of professional secrecy.
4.3.87. Articles: 64 –
70, 248-255
4.3.88. Indicator - Existence and extent of
provisions in respect of -
Practical Cooperation
Authorisation/ongoing assessment of compliance with operating
conditions
- Preauthorisation consultation in respect of
undertakings which form part of a cross-border group
Supervisory Activity
- Communication of concerns regarding
the group, including those relevant to the soundness of the
group and/or undertaking’s within the group’s financial
position, policies and procedures.
Ability and willingness to
cooperate in respect of the assessment of:
- shareholder
suitability; and
- reputation/experience of directors
Cooperation agreements
- Ability to enter into cooperation
agreements (subject to guarantees of professional secrecy)
Crisis situations
- Information sharing
4.3.89. Indicator
- Existence and extent of provisions in respect of - Exchange
of Information with:
supervisory authorities
other
authorities/bodies/persons/institutions responsible for, or
having oversight of:
- supervision of financial
organisations /markets
- liquidation/bankruptcy
proceedings
- carrying out statutory audits of accounts
- detection/investigation of breaches of company law central
banks
government administrations responsible for
financial legislation (for reasons of prudential control)
4.3.90. The existence and extent of provisions in respect of
- Professional Secrecy - Conditions of obligation:
Confidential information - identification
Legal duty to
protect confidential information
Applicable to all relevant
individuals (i.e. all those who work, have worked or act(ed)
on behalf of the supervisory authority)
Ongoing obligation
(applicable whilst working/acting on behalf of supervisory
authority and on continuous basis thereafter)
Disclosure of
confidential information in restricted and clearly defined
circumstances as well as subject to conditions of professional
secrecy
Use of confidential information only in the course of
supervisory duties:
- compliance monitoring (including
monitoring of technical provisions, solvency margins,
administrative/accounting procedures and internal controls)
- imposition of penalties
- court proceedings/appeals
Consent of Competent Authority where the confidential
information originates from another competent authority
-
prior agreement to the disclosure - disclosure is made in
accordance with any specified conditions,
including those
relating to the purpose of the disclosure and use of the
information.
4.3.91. Indicator - Existence and extent of
provisions in respect of - Professional Secrecy - Exceptions
to obligation:
Express agreement to disclose/use
Summary/aggregate disclosure (individual undertaking not
identifiable)
Civil/criminal proceedings (where the
undertaking has been declared bankrupt or is being
compulsorily wound up - information must not concern third
parties involved in rescue attempts )
4.3.92. Indicator –
breach of the obligation of professional secrecy Provisions
in national law in respect of the breach of professional secrecy
(offences, penalties, enforcement)
Annex 1 -
Assessment Methodology
A.1. Note: the assessment
methodology has not been revised following the consultation
period. The text below provides a high level outline of the
methodology to be employed in the future by CEIOPS.
It
constitutes work in progress which once revised will be subject
to consultation.
A.2. This Annex provides a high level
outline of the methodology to be applied when assessing the
equivalence of a third country supervisory regime.
A.3.
CEIOPS will perform assessments of the equivalence of a third
country supervisory regime upon the request of the European
Commission or - in the absence of such a request and where
appropriate – on its own initiative.
A.4. In the
performance of an assessment of the equivalence of a third
country supervisory regime, any criteria adopted by the European
Commission in the form of Level 2 implementing measures, will be
applied by CEIOPS.
In the absence of any relevant Level
2 implementing measures, CEIOPS will observe the principles,
objectives and indicators provided in this advice.
A.5.
Decisions on equivalence can be taken either by the European
Commission or by the relevant group supervisor after consulting
CEIOPS (see par. 3.1.4 and 3.1.5 as well as Article 227 and
260). In the absence of a decision from European Commission:
• CEIOPS may, on its own initiative, reach a common
agreement amongst CEIOPS Members on the equivalence of a third
country supervisory regime,; and/or
• Member States may
undertake individual assessments of the equivalence of a third
country supervisory regime, within the context of article 172 of
the Directive.
Scope
A.6. The assessment to be
performed by CEIOPS will be of the equivalence of the regime in
existence and applied by the third country supervisory
authority, at the
time of the assessment.
A.7.
A third
country supervisory authority must demonstrate that the regime
applicable in its jurisdiction meets each of the principles and
objectives formulated by the European Commission for a
positive assessment of equivalence.
A.8. Assessments will
be kept under review and take into account any developments that
might lead to relevant changes in the third country supervisory
regime.
Conduct of assessments
A.9. The third country
supervisory authority will be invited to complete a
questionnaire modeled on criteria formulated by the European
Commission.
A.10. The assessment will be based on, but
not limited to, the replies provided in the questionnaire.
Additional information/explanations will be requested of the
third country supervisory authority, where appropriate.
A.11. The process of assessing each principle requires a
judgmental weighing of numerous elements.
The assessment
will be conducted by CEIOPS and the outcome of the assessment
communicated to the European Commission.
The European
Commission makes the final determination of equivalence having
received CEIOPS’ advice.
Conduct of assessments - access
to information
A.12. When conducting the assessment,
assessors will require access to a range of information and
persons – as such, the cooperation of the third country
supervisory
authority is essential.
A.13. The
information required as part of the assessment may include:
• publically available information (e.g. laws, regulations
and administrative policies); and/or
• internal
information (e.g. self-assessments and operational guidelines).
The information should be provided by the third country
supervisory authority, subject to any professional secrecy
requirements.
A.14. The individuals and organisations
with which the assessor may need to consult include insurance
supervisor(s), other relevant authorities (including supervisory
authorities), relevant government ministries, insurance
companies, insurance industry associations, actuaries, auditors
and other financial sector participants.
Assessment
categories - Assessment of principle/objective observance:
A.15. In undertaking the assessment each principle/objective
as provided in a Level 2 text or in this advice, will be
assessed using five categories: observed, largely observed,
partly observed, not observed and not applicable.
In
assessing each principle and objective, consideration will be
given to the relevant indicators of equivalence.
A.16.
A1.15. For a principle and objective to be considered observed,
the third country supervisory authority must provide evidence
that the:
• relevant national provisions (e.g. legal,
regulatory, administrative provisions) exist; and
•
national provisions are applied in practice.
When the
national provisions are not in place at the time of the
assessment, proposed improvements can, where appropriate, be
noted in the assessment report
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