Recent developments in
EU insurance regulation:

Outline of the presentation
– Reinsurance Directive
– Solvency II Directive
– Insurance Mediation Directive
– Motor Insurance Directives
– Guarantee Schemes

EU Insurance Regulation
• A single insurance market, promoting economic efficiency and market integration, requires a common framework to allow insurers to operate throughout the
EU.
• The legal framework must also protect customers, particularly individuals.
• To achieve these goals, the European Union has adopted a number of Directives which have laid down the conditions for conducting insurance business in the internal market.
• A common prudential framework has been established, founded in particular on three generations of Life and
Non-life Directives which harmonise the essential rules
(minimum harmonisation).

EU Insurance Regulation
• The Life and Non-life Insurance Directives have set up a supervisory regime based on the single licence and exclusive prudential supervision by the competent authorities of the insurance undertaking’s home Member State.
• This supervisory regime allows the insurance undertaking to conduct business in any other
Member State, under the freedom of establishment or the freedom to provide crossfrontier services.

EU Insurance Regulation
• A series of specific motor insurance Directives have aimed at addressing the specific problems of this branch within a single market (free movement of vehicles and adequate compensation for accident victims).
• In the area of reinsurance, where up until now there has been no coordinated Community regulatory regime, a proposed directive to create a genuine EU-wide market is currently nearing adoption.

EU Insurance Regulation

EU Insurance Regulation
• The major project in the insurance sector at the present time and indeed for the next few years is the Solvency II project to radically revise the prudential framework for the supervision of insurance and reinsurance undertakings in the
EU.
• This will involve a more risk-oriented approach for insurance supervision in line with developments in other financial fields. The
Commission aims to present a framework directive proposal towards the end of 2006.

EU Insurance Regulation
• The Commission also works closely with a number of international organisations in order to ensure as far as possible a greater uniformity of prudential legislation in the insurance field.
• Further information on the ongoing work and links to the Directives and related dossiers can be found on the Insurance and Pensions Unit website at: http://www.europa.eu.int/comm/internal_market/insuranc e/index_en.htm

Reinsurance Directive
Purpose of the Directive
• To create a real single market for reinsurance in the EU.
Reinsurance is one of the few remaining financial sectors with no harmonised framework.
• To ensure the financial standing of EU reinsurers. This will benefit direct insurance undertakings as well as their policyholders.
• To strengthen the standing of EU reinsurers internationally, and contribute to international financial stability.
• To enable the offer and use of modern financial instruments by insurance/reinsurance undertakings, particularly important for financial centres such as Ireland and Luxemburg.
• To suppress remaining barriers to reinsurance trade in the EU
(in particular reinsurance collaterals).

Reinsurance Directive
International context
• G7, IMF and Financial Stability Forum: concerns for financial stability due to lack of transparency and supervision in the reinsurance field.
• OECD: ongoing work in exchange of information between supervisors on reinsurance undertakings.
•
IAIS (International Association of Insurance Supervisors): work on standards for reinsurance supervision with the ultimate goal of mutual recognition.

Reinsurance Directive
General features of future reinsurance supervision system
• An approach based on harmonisation and mutual recognition.
• A fast-track approach for a directive based primarily on current direct supervision rules.
• A mandatory licensing system.
• Solvency requirements in line with those of direct insurance, but adjusted to suit reinsurance.
• Preparation for Solvency II – create common set of rules across all insurance fields
• Proposal for Directive currently being discussed in
Council and Parliament

Solvency II
• Is the project to fundamentally overhaul the European rules in order to introduce a risk-oriented calculation of the solvency requirements for (re)insurance companies, increase harmonisation of the calculation of insurance liabilities (technical provisions) and to foster the convergence of supervisory practices.
• It is closely linked with international developments in accounting, supervision and actuarial science.
• It will improve risk management and understanding of the business within companies and also have a profound impact on the professional qualifications required of supervisors.
• The project continues to receive wide support from industry practitioners, supervisors and ministries. It will be more advanced and comprehensive than Basel II.

Solvency II
Why is Solvency II needed?
• The present rules (percentage of premiums and claims in Non-life insurance and a percentage of insurance liabilities in Life insurance), developed in the 1960s, are generally accepted to be outdated since they were designed for an insurance industry:
– Investing predominantly in bonds and real estate, as a result of which market risk is to a large extent neglected. However equity investment gradually increased during the 1990s.
– In which price cartels were normal, which changed with new competition rules introduced in the early
1990s.

Solvency II
Why is solvency II needed?
– Where a large part of continental European supervisors approved prices and conditions before companies were allowed to launch a product. This has been forbidden since the introduction in 1994 of the 3rd generation insurance Directives.
– In which the liberalisation of capital movement still had to take place.
– Where insurance liabilities were difficult to calculate, as a result of which companies used this balance sheet item also to stabilise their P/L accounts.
Computing power and actuarial knowledge has increased to cope with this complexity.

Solvency II
Why is solvency II needed?
• Although the system worked well in the 1980s, it has not worked well since the second half of the 1990s. Supervisors now generally acknowledge that the system does not cope with the risks insurance undertakings are exposed to nowadays.
• Both supervisors and companies also consider the present calculations to deliver excessively low requirements. A number of EU Member States have therefore developed their own solvency system (e.g. FIN, DK, UK, NL). The German industry has developed its own system to help companies better understanding the risks they run.
• Compared internationally, the US, Canadian, Australian and
Japanese systems are all risk-oriented, which the current EU system is not. The Australian system is considered to be the most advanced and modern system.

Solvency II
What will Solvency II deliver?
• Solvency II is designed to cope with the (ever) changing market conditions through a prospective, risk-oriented and principle based approach that covers capital requirements, supervisory activities, reporting and disclosure.
• It will result in a better managed and more competitive industry in order to let it do what it does best: namely, to accept risk.
• The new solvency system will encourage and give incentives to companies to measure and properly manage their risks.
• This risk-oriented approach implies the recognition of internal models (partial or full) provided these improve risk management and reflect the companies’ true risk profile better than the standard formula. The use of internal models can lead to lower requirements.
• International compatibility with accounting, supervisory and actuarial standards is aimed at, by collaborating closely with international standard setters. The capital requirements will be calibrated to obtain an objectively set confidence level, based on largely harmonised supervisory accounts, in line with international developments.

Solvency II
• It will assess the overall solvency of (re)insurance companies.
Overall solvency means that it not only consists of quantitative requirements, but will also cover qualitative aspects that affect the risk-standing of the company. In addition, it also incorporates a review of the forms of capital that could cover the requirement
(which was not done in Basel II).
• Solvency II takes its starting point in a 3-pillar structure inspired by
Basel II. However, the scope and magnitude of the individual pillars are not necessarily the same. Solvency II is expected to be more complete, coherent, advanced and modern than Basel II, with workable solutions.
• For financial groups the relevant rules will be set at the relevant level, taking into account the fact that management decisions increasingly are taken at group level. This implies an appropriate split of responsibilities between supervisors, in particular as regards the validation of internal models and the adequate distribution of capital in the group.

Insurance Mediation Directive
Context
•
Insurance mediation plays a capital role in distribution and selling of insurance: essential for retail markets and consumers.
• Before the directive several obstacles remained and impeded an internal market for insurance mediation: uncertainty on legislation applicable, need to comply with several national divergent legislations.
•
Insurance intermediaries were not able to avail themselves of the Treaty freedoms to pursue their business in the EU.
• Insurers’ activities also hindered in the internal market: they usually act through insurance intermediaries.
• Action Plan for Financial Services considered insurance intermediation as an area where priority action was needed to complete the internal market, particularly for retail markets.

Insurance Mediation Directive
Purpose and state of play
• Establish an internal market for insurance mediation and complete insurance internal market by:
– Providing for a regulatory framework which ensures a high level of professionalism of insurance intermediaries;
– Guaranteeing a high level of protection to customers.
• Applicable as of 15 January 2005.

Insurance Mediation Directive
General features
• An approach based on harmonisation and mutual recognition and home country control (Single passport)
(financial services legislation approach)
• Applicable to all insurance intermediaries (agents, brokers, bancassurance, car dealers).
• Very few exceptions (persons distributing insurance complementary to the product or service supplied by these persons and covering risks related to such products or services (extended guarantees, travel agencies).

Insurance Mediation Directive
Regulatory framework
• A mandatory registration system of all insurance intermediaries in their Home Member State, subject to the fulfilment of professional requirements:
– Possession of appropriate knowledge
– Good repute and no bankruptcy record
– Professional Indemnity cover against negligence
(
€ 1.000.000 per claim or €1.500.000 per claim/per year in aggregate).
– Sufficient financial capacity when the intermediary handles money.
• Intermediaries duly registered may conduct business in the EU on a cross-border basis

Insurance Mediation Directive
Information requirements to the customers
• To whom?
Customers who are not large industrial risks policyholders
• How to inform? Written form on paper or any durable medium (DVD, floppy).
• Clear and accurate manner comprehensible to the customer
• When?
Before the conclusion of the insurance contract
• What information?
– Identity, address, register of the intermediary, financial links with an insurance undertaking over 10% of capital.
– Capacity: exclusive agent, agent, broker.
– The intermediary must specify in writing the demands and needs of the customer and specify the underlying reasons for the advice given
– If he gives advice on the basis of a fair analysis, he must base the advice on an analysis of a sufficient number of insurance contracts.

Motor Insurance Directives
Scope of the motor insurance directives
• The motor directives cover compulsory insurance on civil liability arising from the use of motor vehicles.
• There are four motor insurance directives in force and another directive (the fifth motor) nearing final adoption
(see below).

Motor Insurance Directives
The first three Motor Insurance Directives (1972-1990)
• With the first three Directives, the Community took fundamental steps towards establishing a single market in the field of motor insurance:
• they introduced an obligation for all motor vehicles in the
Community to be covered by insurance against third-party liability (compulsory motor insurance) and fixed minimum amounts for such insurance cover.
• they ensured the free movement of motor vehicles by making the insurance certificate generally valid throughout Community territory and obviating the need for insurance checks at borders..
• they ensured that victims of accidents caused by unidentified or uninsured vehicles would be compensated through the establishment of motor guarantee funds in all Member States.

Motor Insurance Directives
The Fourth Motor Insurance Directive (2000)
• Protects victims when the accident takes place outside their Member
State of resident (visiting victims)
• Provides for quick and efficient mechanisms for settling claims in respect of such accidents
The Fifth Motor Insurance Directive (pending of final adoption)
• The need to revise and modernise the Motor Insurance Directives was confirmed by a wide-ranging consultation initiated by the Commission in 1999. In July 2001 EP adopted a Resolution requesting the revision of the motor directives.
• In June 2002 the Commission adopted a Proposal for a Fifth Motor
Insurance Directive.

Motor Insurance Directives
The Fifth Motor Insurance Directive (pending final adoption)
Main elements of the proposal are:
•
Review of minimum amounts of insurance cover fixed in 1984
• Facilitating insurance cover for temporary stays in another MS
• Facilitating insurance cover when purchasing a car in another
MS
• Coverage of pedestrians and cyclists
• Making it easier for the policyholder to change insurer: insurer to provide a statement on claims experience
• Applying to all accidents the mechanisms for the quick and efficient settlement provided for in the 4th Motor Directive
As a result of an informal agreement at the second reading among the three institutions (EP, Council and
Commission), final adoption of the directive only awaits certain formalities. The Directive shall be implemented into national legislation within two years after its publication in the Official Journal

Guarantee Schemes
Starting point:
• Insurance guarantee schemes are arrangements providing a final safety net for the protection of policyholders in the event of the winding-up of an insurance undertaking.
• In 2001 Ireland raised the problems created by the lack of
Community harmonisation and co-ordination with regard to guarantee schemes protecting policyholders where an insurance undertaking is wound up.
• The issue reflected the negative experience with the failure of an English insurance company doing business in
Ireland - Irish customers were not covered by the UK guarantee scheme system.

Guarantee Schemes
The problem:
• Currently small but increasing number of GSs in the Member
States (6 MS life, 8 MS non-life, 3 MS life & non-life).
• Confusion, gaps and overlaps due to the co-existence of diverse systems.
• Different scope of protection in the existing systems.
• Lack of equivalent treatment of European insurance creditors in the event of the winding-up of an insurance undertaking.
•
Lack of level playing field between financial sectors as such systems exist in other financial sectors.
• Lack of level playing field between insurance undertakings from different Member States.
• Special long-term protection is needed as social security shifts towards private insurance and given the increasing importance of long-term savings products.

Guarantee Schemes
General Features of a possible future insurance guarantee scheme system:
• Minimum harmonisation (organisation and financing should be left to Member States) and mutual recognition of MS systems.
• Obligation for MS to set-up a guarantee scheme/mutual recognition of national schemes.
• Obligation for insurance companies to join a guarantee scheme.
• Home MS system should cover all branches and operations
(Home country principle - same as prudential supervision).
• Scope of cover: Focused on consumer protection.
• Tasks of the scheme: flexibility: two possible systems (pay-out or continuity of insurance contracts).
• Level of protection: a percentage of the claim to be defined.

Guarantee Schemes
• State of play:
• On-going work in Commission working group
• Discussions on draft articles (obligation to create a scheme, the home
Member State principle (territorial scope), the tasks which should be carried by the scheme and the claims to be covered)
• Outlook:
• Further discussions on specific provision on the different elements to be harmonised are needed.
• Consultation of Insurance Committee
• Impact assessment
• Decision to be made on whether or not to table a Commission proposal; possible timing of proposal second half of 2006

What does it mean for Russia?
Russian insurers in the EU:
• Have to comply with the Directives, early preparation is essential
• Compatibility with Russian insurance regulation
Domestic Russian insurers:
• Could have an impact on future Russian insurance legislation
• Competitiveness of Russian insurers
EU insurers in Russia:
• Treatment of risks underwritten in Russia
• Russia‘s supervision of EU insurers operating in Russia