Introduction
Welcome to our insurance updater. We will highlight key legislative and regulatory developments. We will also review court judgments and insurance market publications that are likely to be of interest to you.
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Council of EU publishes document on proposed Directive amending Solvency II transposition and application dates
On 1 June 2012, the Council of the EU published a general approach document on the proposed Directive amending the transposition and application dates for the Solvency II Directive.
The Commission published a legislative proposal for the Directive on 21 May 2012 (for further information, please refer to Insurance updater 23 May 2012). The General Secretariat of the Council states that the proposal was considered by the working party on financial services on 29 May 2012 and is supported by a qualified majority of delegations.
The Presidency recommends that the Permanent Representatives Committee should:
- Agree on the general approach for the Directive on the basis of the Commission's proposals.
- Invite the Presidency to enter into negotiations with the European Parliament to reach political agreement on the Directive, with the aim of adopting the legislation at first reading.
On 7 June 2012, the European Parliament updated its procedure file on the proposed Directive amending the transposition and application dates for the Solvency II Directive. The procedure file indicates that the Parliament will consider the proposed Directive during the 2 to 5 July 2012 plenary session.
For further information: Council of the EU general approach document
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EIOPA publishes financial stability report for first half of 2012
On 11 June 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published its first half-yearly report for 2012 on the financial stability of the insurance, reinsurance and occupational pension fund sectors in the European Economic Area (EEA). The report covers developments in financial markets, the macroeconomic environment, and the insurance, reinsurance and occupational pension fund sectors.
Focusing on the insurance sector, EIOPA summarises the main issues and conclusions based on its analysis of the 20 largest EU insurance groups. The report explains that the majority of insurance companies are well capitalised under the current Solvency I regime. By the end of 2011, they were, on average, capitalised at 200% of required levels, however, their capitalisation and profitability now face a lightly decreasing trend.
EIOPA has analysed the insurance sector’s resilience to possible longer-lasting low interest rates and concludes that, whilst overall the sector seems able to cope with these challenges for some time, the situation may change if other potential threats materialise. Potential threats identified in the report include renewed turmoil due to the failure of governments to stabilise fiscal situation, a strong weighing of these developments on economic growth, or a disruptive unwinding of currency risk. EIOPA considers that the first order effects of such an event will be limited in the EU insurance sector, with local insurers most likely to suffer. Second order effects, however, may impact other EU insurers, mainly through the potentially triggered disruption of financial markets. EIOPA states that it will continue to monitor the situation closely.
The report goes on to consider the reinsurance sector and explains that, due to the large number of severe catastrophic events that occurred, 2011 was the costliest year ever for the sector. In addition, the worsening financial crisis and low interest-rate levels meant reinsurance firms faced huge challenges. By the end of 2011, however, the sector remained relatively stable and well capitalised. EIOPA has observed only a modest increase in rates at the start of 2012, partly explained by the absence of major loss events in the EU and North America.
For further information: EIOPA Financial Stability Report 2012
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FSA publishes Quarterly consultation (No. 33)
On 6 June 2012, the Financial Services Authority (FSA) published CP12/11 Quarterly consultation (No. 33). Amongst other things, the paper proposes changes to the General Prudential sourcebook (GENPRU) and the Prudential sourcebook for Insurers (INSPRU).
Insurance modification
The base capital resources requirement (BCRR) is the amount of capital resources an insurer is required to hold. Following the European Commission’s review of certain amounts laid down in the Insurance and Reinsurance Directives, taking account of changes in the European index of consumer prices, the FSA proposes increasing the BCRR for insurers in order to comply with those Directives. GENPRU 2.1.30 provides a table of BCRR which the FSA proposes amending as follows:
- BCRR for captive reinsurers will be increased to €1.2m.
- BCRR for pure reinsurers (other than captive reinsurers) will be increased to €3.7m.
- BCRR for life insurers and for general insurers writing liability business (other than pure reinsurers) will be increased to €3.7m, with one-quarter reduction for mutuals.
- BCRR for general insurers not writing liability business (other than pure reinsurers) will be increased to €2.5m, again with one-quarter reduction for mutuals.
Additionally, the FSA proposes changes to the premium and claims indices used to calculate the general insurance capital requirement (GICR), increasing the amount stated in INSPRU 1.1.45R for premiums from €57.5m to €61.3m, and the amount stated in INSPRU 1.1.47R for claims from €40.3m to €42.9m.
The Interim Prudential sourcebook for Friendly Societies (IPRU(FSOC)) and the Interim Prudential sourcebook for Insurers (IPRU(INS)) will be amended to reflect the changes made in GENPRU and INSPRU.
The closing date for responses to the paper is 6 August 2012.
For further information: CP12/11 Quarterly consultation (No. 33)
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ABI updates guide of good practice for unit linked funds
On 6 June 2012, the Association of British Insurers (ABI) published an updated edition of A Guide of Good Practice for Unit Linked Funds. The guide sets out standards that the ABI believes all companies managing unit linked funds should aspire to and work toward. The ABI explains that firms should have reviewed their operations against the updated standards and begun making progress towards the changes needed to meet these standards by 31 December 2012.
The guiding principle throughout is that firms must act in accordance with the FSA’s Principles for Business (PRIN) which includes compliance with the treating customers fairly (TCF) requirements. This new edition has been updated by the ABI to reflect developments in practice and experience gained in using the original guide, published in June 2006. The FSA has indicated that it will take account of the standards set out in the guide in its supervision of unit linked life offices. The 2012 version includes a section providing additional guidance on issues firms may wish to bear in mind when considering proposals to launch, merge or close funds.
For further information: A guide of good practice for unit linked funds
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