28 November 2019

Commercial Risk Europe: Europe’s mutual insurers press for mandatory application of proportionality under Solvency II

The European risk and insurance management community has found an important ally in its efforts to ensure captives are granted more appropriate treatment under the proportionality principle within Solvency II, in the form of the Association of Mutual Insurers and Insurance Cooperatives in Europe (Amice).

The association represents a powerful and growing sector within the European insurance community. About half of all licensed EU insurers are mutuals and their market share accounts for roughly a third of all European insurance business, valued at close to €400bn in premiums.

Many mutuals are smaller businesses that, under the principle of proportionality, should not be subject to the full capital and reporting requirements of Solvency II, which was designed chiefly to provide greater protection for customers of the bigger listed European and international insurance groups.

The good news is that before launching Solvency II in January 2016, the EU accepted that smaller, simpler and certain types of operations, such as many mutuals and captives, should not have to comply with the same onerous reporting and capital requirements as the big listed groups, and thus included the principle of proportionality within the directive.

The bad news is that this principle is not mandatory. It is up to national supervisors to decide when, where and how it is applied. This has led to frustration among Europe’s risk captive community – represented at European level by Ferma and the European Captive Insurance and Reinsurance Owners Association (ECIROA) – which says national supervisors have failed to deliver.

This has made it more difficult for risk and insurance managers to justify their captives, at a time when they are needed more than ever as market conditions rapidly harden in some sectors.

Last year, the EC asked the EIOPAto provide technical advice for a comprehensive review of the Solvency II Directive. EIOPA will provide that technical advice in the form of a published Opinion in June 2020, and is seeking input from the market.

This is clearly a good chance for the risk and insurance management community to persuade EIOPA that the proportionality principle is not being applied as consistently or as widely as possible.

Ferma has presented a “concrete proposal” to European regulators for simpler, harmonised and more consistent Solvency II rules for captives, as part of the regulation’s upcoming review. The federation and other captive representatives seem increasingly optimistic that such work will lead to a reduction in the burden on captives.

But Ferma and ECIROA are competing for attention with the huge European insurance industry, which is much more interested in ‘bigger issues’ such as long-term guarantee and equity risk measures that significantly affect their balance sheets and capital requirements.

However, the news that Amice is as keen as the risk management community to see the proportionality principle strengthened will surely support their case.

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