In this issue:-

  • Solvency II Framework Directive – 2007/44 EC
  • European Commission Reviews the Insurance Block Exemption
  • Proposed New European System of Financial Supervision
  • Health Insurance (Miscellaneous Provisions) Act, 2009

SOLVENCY II FRAMEWORK DIRECTIVE - 2007/44EC

The Solvency II Framework Directive will introduce a risk based capital regulatory regime for insurers, reinsurers and captive companies with more than €5 million in gross premium volume that operate in the European Union. This Directive is due to be implemented no later than 31 October 2012.

Following approval by the European Parliament of the framework principles (Level 1) in May 2009, progress is now underway to develop Level 2, the more detailed Implementing Measures. The Level 2 Implementing Measures are required to take account of advice from the Committee of European Insurance and Occupational Pension Scheme Supervisors ("CEIOPS") whose advice is due by the end of 2009.

CEIOPS has released the third set of consultation papers relating to Level 2 implementation measures for Solvency II. The 16 papers, which cover topics including partial internal models, calibration of non-life underwriting risk and advice on simplifications have a response deadline of 1200 CET on 11 December 2009.

EUROPEAN COMMISSION REVIEWS THE INSURANCE BLOCK EXEMPTION

The insurance block exemption exempts certain agreements between insurers from scrutiny under the European rules on agreements between competitors (Article 81 of the EC Treaty). However, the current block exemption introduced in 2003 expires in March 2010 and the European Commission is currently consulting on its renewal.

The Insurance Block Exemption

The current block exemption was introduced in 2003. It exempts, subject to conditions, certain categories of agreement from Article 81, which prohibits anticompetitive agreements. The categories of agreement that are currently covered by the block exemption are:

  • joint calculations, tables and studies;
  • standard policy conditions;
  • insurance and reinsurance pools; and
  • standards for security devices.

This exemption was introduced before the 2004 reforms, which removed the possibility of obtaining individual exemptions for particular agreements from the Commission. In certain industries, such as insurance, block exemptions were introduced to provide certainty without the needed for a multiplicity of notifications. However, since those reforms, the possibility of obtaining explicit exemptions has been removed and the Commission expects companies to 'self-assess' their agreements to conform with competition law. Thus, under the new regime, even if the block exemption were to be removed entirely, it would not mean that the agreements covered by it would cease being legal. Rather, they would simply have to be assessed on a case-by-case basis as happens in other industries.

The Commission's Review Of The Block Exemption

Having conducted a wide-ranging business insurance sector inquiry in 2007, the Commission began its formal review of the block exemption's operation in 2008 and received responses to its consultation paper from a range of insurers and other interested parties.

In March 2009, the Commission followed this up with its formal report to the European Parliament and Council on the functioning of the block exemption, setting out its recommendations.

The Commission's Recommendations

The Commission recommends that the exemption for joint calculations, tables and studies should, in one form or another, be renewed. The Commission considers this helps smaller insurers and new entrants, which would otherwise lack the statistics to allow them to price the risks they insure.

However, the Commission does not rule out making amendments to the terms of this exemption.

The Commission proposes to drop the exemption for standard policy conditions. It concludes that in many cases, the block exemption is not necessary for it to be clear that the conditions are permissible and that many or most would exist even without it.

Insurance Pools

The Commission leaves open the possibility of renewing the block exemption for insurance pools, albeit possibly on a more restricted or clarified basis.

Standards For Security Devices

Finally, the Commission indicates that it does not propose to renew the exemption for standards for security devices. The Commission considers that this sort of standard setting is far from unique to the insurance industry and a specific block exemption is therefore not needed.

The final proposal will be put out to consultation in the autumn with a view to the revised block exemption (if any) being put in place in 2010.

Effects Of The Commission's Proposals

At a general level, a clear message emerges from the Commission's report: some insurers have claimed too quickly that the block exemption applies to their agreement. The Commission is clear that detailed scrutiny needs to be given to whether the conditions that attach to each category of exemption are met in each particular case. Given that the renewed parts of the block exemption are likely to be subject to even more significant caveats and restrictions, any new block exemption will be more closely scrutinised. Similarly, for those insurers participating in agreements that cease to be exempted, existing agreements will not have to be abandoned – but will require examination to confirm whether they fall outside Article 81(1) altogether or can be justified under Article 81(3) on the basis of the benefits they create. This will require some detailed case by case analysis.

PROPOSED NEW EUROPEAN SYSTEM OF FINANCIAL SUPERVISION

On the 24 September 2009, the European Commission adopted an important package of draft legislation to significantly strengthen the supervision of the financial sector in Europe. The aim of these enhanced cooperative arrangements is to sustainably reinforce financial stability throughout the EU; to ensure that the same basic technical rules are applied and enforced consistently; to identify risks in the system at an early stage; and to be able to act together far more effectively in emergency situations and in resolving disagreements among supervisors. The legislation will create a new European Systemic Risk Board ("ESRB") to detect risks to the financial system as a whole with a critical function to issue early risk warnings to be rapidly acted on. It will also set up a European System of Financial Supervisors ("ESFS"), composed of national supervisors and three new European Supervisory Authorities for the banking, securities and insurance and occupational pensions sectors.

The current financial crisis has highlighted weaknesses in the EU's supervisory framework, which remains fragmented along national lines despite the creation of a European single market more than a decade ago and the importance of pan-European institutions. These legislative proposals address those weaknesses both at the macro- and microprudential supervision levels by creating:

  • an ESRB will have the power to issue recommendations and warnings to Member States (including the national supervisors) and to the European Supervisory Authorities, which will have to comply or else explain why they have not done so. The heads of the ECB, national central banks, the European Supervisory Authorities, and national supervisors, will participate in the ESRB. The creation of the ESRB is in line with several initiatives at multilateral level or outside the EU, including the creation of a Financial Stability Board by the G20.
  • an ESFS for the supervision of individual financial institutions ("micro-prudential supervision"), consisting of a network of national financial supervisors working in tandem with new European Supervisory Authorities, created by the transformation of existing Committees for the banking securities and insurance and occupational pensions sectors. There will be a European Banking Authority ("EBA"), a European Insurance and Occupational Pensions Authority ("EIOPA"), and a European Securities and Markets Authority ("ESMA").

Regarding micro-prudential supervision, currently there are three financial services committees for micro-financial supervision (supervision of individual financial institutions) at EU level, with advisory powers only: the Committee of European Banking Supervisors ("CEBS"), Committee of European Insurance and Occupational Pensions Committee ("CEIOPS") and the Committee of European Securities Regulators ("CESR").

The new Authorities will take over all of the functions of those committees, and in addition have certain extra competences, including the following:

  • developing proposals for technical standards, respecting better regulation principles;
  • resolving cases of disagreement between national supervisors, where legislation requires them to co-operate or to agree;
  • contributing to ensuring consistent application of technical Community rules (including through peer reviews);
  • the European Securities and Markets Authority will exercise direct supervisory powers for Credit Rating Agencies; and
  • a coordination role in emergency situations.

The proposals have been the subject of extensive consultation both after the publication of the recommendations by a group of experts mandated by President Barroso and chaired by former IMF Managing Director Jacques de Larosière and between the end of May and mid July, after the Commission outlined its proposals to the European Council. The June EU Summit endorsed the new supervisory framework and called for the rapid adoption of the necessary legislative texts, with a view to having the framework fully in place by 2010.

HEALTH INSURANCE (MISCELLANEOUS PROVISIONS) ACT, 2009

Following clearance by the European Commission in June 2009 of a new Irish health insurance scheme ("the scheme") that includes both levies and tax relief measures designed to decrease the risk differentials for health insurers between old and young customers, the new Health Insurance (Miscellaneous Provisions) Act, 2009 which sets out the mechanics of the scheme has been brought into law with effect from 19 July 2009.

The scheme gives insured individuals tax relief that increases with age and is paid directly to that person's insurer. This relief is financed by a flat rate levy on all insurers for each of their adult and child customers. The net effect of the scheme is that the insurance of older people will become cheaper for insurance companies and the cost of insuring younger people will become more expensive for insurance companies. The VHI, having a worse than average risk profile due to its large number of ageing customers, stands to benefit the most from the scheme.

The Health Insurance (Miscellaneous Provisions) Act, 2009 also includes certain additional powers for the Health Insurance Authority, the independent body charged with overseeing the operation of the Irish health insurance market and the implementation of the new Irish health insurance scheme.

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