Directive 2009/138/EC (Solvency II) introduces a fundamentally new approach for the supervision of insurance companies and led to creation of a new Versicherungsaufsichtsgesetz (Insurance Supervision Act – VAG 2016). The VAG 2016 was published in the official journal on 20. February 2015 (BGBl. I Nr. 34/2015) and will enter into force on 1. January, 2016.
The risk-oriented and forward-looking approach of Directive 2009/138/EG, OJ No. L 335/1 of 17 December 2009 (Solvency II) introduces a fundamentally new approach for calculating insurance company capital requirements and changes the supervisory measures and tools available. Following the example of Basel II, the new rules are divided into three pillars:
- Pillar 1: Quantitative requirements
- Pillar 2: Qualitative requirements and supervisory rules
- Pillar 3: Reporting and disclosure
The supervisory provisions are more strongly focused on qualitative requirements than before and business management tools are significantly more important - in particular professional risk management. Solvency II goes beyond the provisions of bank supervision law and also includes provisions on the valuation of assets and liabilities of insurance companies for solvency purposes (total balance sheet approach) based on international accounting standards. New rules are also provided for the supervision of insurance groups.
In addition to the new Solvency II provisions, Directive 2009/138/EC also includes a recodification of 14 existing directives in the areas of life and non-life insurance, reinsurance, insurance groups and liquidation. The parts of these directives not affected by Solvency II were adapted in the technical provisions of the revised version and largely assumed unchanged.
From a formal point of view, Solvency II is a framework directive (level 1) adopted by way of the Lamfalussy process, with detailed specifications then provided by a directly applicable EU Regulation (level 2). Technical areas are specified using legally binding technical standards (BTS, level 3) developed by the European Insurance and Occupational Pensions Authority (EIOPA) and adopted by the European Commission. All areas of the new supervisory law can be explained by legally non-binding guidelines from EIOPA (level 3). The Lamfalussy structure is intended to allow flexible responses to market developments and promote further harmonisation in the EU.
The new tools and methods introduced by Solvency II are being tested in quantitative impact studies with the participation of the insurance industry. The results of the sixth quantitative impact study (QIS6 - Quantitative Impact Study) will be published in the first quarter of 2015 by the European Insurance and Occupational Pensions Authority.
The framework directive was amended by the Directive 2014/51/EU (referred to as Omnibus II). In addition to adjustments to the new European supervisory reform (inclusion of authority for developing binding technical standards, implementation of the new binding dispute resolution procedure), the text also contains transitional provisions to allow "phasing in" of the new system. At the same time, the level 2 process has been "Lisbonised". The entry into effect of Solvency II was delayed until 1 January 2016 and the requirement for transposition by Member States was set to March 31., 2015.
Basic Features of Solvency II
Pillar 1: Quantitative Requirements
The provisions on calculating capital requirements follow a risk-oriented forward-looking approach and include the following elements:
- Measurement of assets and liabilities at fair value and calculation of technical provisions (= preparation of an additional solvency balance sheet for regulatory purposes)
- Calculation of the Solvency Capital Requirement and Minimum Capital Requirement
- Provisions on eligible capital
- Investment provisions
The Solvency Capital Requirement is the economic capital that an insurance or reinsurance company must have in order to keep the likelihood of insolvency as low as possible. The Directive assumes an insolvency likelihood of 0.5% p.a. The insurance company can use a standard formula for calculating the Solvency Capital Requirement, or an internal model approved by the supervisory authority.
The Minimum Capital Requirement is the level of capital below which the interests of policyholders would be seriously at risk if the company were to continue its business operations. Breach of the Minimum Capital Requirement triggers strict supervisory measures that could lead to licence withdrawal.
Pillar 2: Qualitative Requirements and Supervisory Rules
The provisions on the powers of the supervisory authorities and requirements for internal control mechanisms and risk management of insurance companies include the following:
- A supervisory examination process together with rules for the supervision of insurance groups
- Power for the supervisor to require additional capital (capital surcharge) if the capital calculated by the insurance company is inadequate for the risk.
- Specification of organisational structure requirements for insurance companies (risk management, controlling, internal audit, actuarial function and outsourcing) and the existence of clear organisational and accountability rules.
Pillar 3: Disclosure and Market Transparency
The following two elements are aimed at ensuring the supervisory authority receives the information it needs for its purposes, and increasing market discipline and insurance company transparency
- Standardised requirements for insurance company reporting to supervisory authorities
- The requirement for publication of an annual report containing key information on solvency and financial status