Disputes over group support may delay new insurance solvency regime

Under current solvency rules, insurance groups in the EU are treated as a collection of separate entities, each supervised individually and locally.

The draft Solvency II framework directive aimed to streamline this system by introducing a dedicated group supervisor in the group's 'home' member state. The group supervisor would work in cooperation with local supervisors, but would have the final say on all aspects of group supervision.

The framework also proposed a system of group support that would allow part of a subsidiary's capital requirement under Solvency II to be met by a guarantee from the parent company that funds would be transferred from the group if required.

In October, a European Parliamentary committee backed the plans for group supervision and support, but amended the proposals to introduce mandatory supervisory 'colleges' made up of the group supervisor and the national supervisors.

Some member states, however, are concerned that the group support provisions would result in the withdrawal of funds from (usually smaller) states where insurance subsidiaries are based, to the parent company's home state, which in many cases will be the UK, France or Germany.

Disagreements within the European Council of Ministers led to a vote on the framework directive being postponed several times. In November, convinced that compromise could not be reached, the French European Presidency stripped out the provisions for group support from the text, retaining the principles of cross-border supervision and cooperation.

Despite opposition from Britain, Ireland, Finland, Denmark and the Netherlands, the Council of European Finance Ministers, known as ECOFIN, approved the amended version without further debate on 2nd December.

It is not yet clear how the different views of the Council and Parliament on group support will be resolved. The first parliamentary reading of the framework directive has already been put back to February 2009. If agreement on the final wording cannot be reached, the directive is likely to go to a second reading, jeopardising the European Commission's hopes for implementation in 2012.

CEA, the European insurance and re-insurance federation, said it was disappointed by the removal of group support from the draft.

"The European insurance industry has always maintained and continues to believe that the group support regime is a fundamental element to Solvency II's economic risk-based regulatory regime," said CEA President Tommy Persson. "The future regulation of Europe's (re)insurers must reflect their economic reality and that reality for many is that they form part of a larger group".

Stephen Haddrill, Director General of the Association of British Insurers said that, without the group support provisions, Solvency II would be "a waste of time".

“While finance ministers are, quite rightly, dealing with the current economic crisis as an international problem needing global solutions, they are proposing a European regulation that ignores the cross-border nature of how companies operate," he said. "This does not make sense and needs to change for a successful Solvency II that protects consumer’s interests.

“The Council has put at risk five years of hard work by insurers, the Parliament and Commission, who are all agreed on the importance of the group proposals.  It is vital that group support is reinstated to ensure a system of regulation fit for the 21st century."