Insurance company solvency is like a slowly maturing wine, carefully tweaked by the French

After a decades-long maturation process, the Solvency II directive regulating the solvency of insurance companies entered into force at the beginning of 2016, replacing a patchwork of rather rudimentary EU-level legislation that failed to take into consideration the risks of the insurance business. It should be noted that Finland had national legislation that was much more advanced and risk-based than the EU framework even before Solvency II. In early June 2022, the French Presidency of the Council of the European Union published the third and final presidency compromise text on amendments to the Solvency II directive. France, a country famous for its mature wines, held the Council presidency until July 2022.

The Finnish insurance sector’s key objectives for the Solvency II review were to reach more reasonable capital requirements, ease the reporting burden, apply the proportionality principle in a determined fashion and minimise overlapping regulation.

France was intent on wrapping up the Solvency II review and the proposal for the Insurance Recovery and Resolution Directive (IRRD) during its presidency. This led to frequent meetings by Council working parties and also to rapid progress. The French presidency seems to have succeeded in finalising the Solvency II review: the European Economic and Financial Affairs Council (ECOFIN) reached an agreement on the general approach to amend the Solvency II Directive on 17 June 2022.

The Council’s general approach is very similar to the Commission’s original proposal issued in September 2021, but it should be noted that the position was formed before the publication of the amendments to lower-level regulation, which makes it difficult to estimate the impact of the amendments. Issuing a proposal on lower-level regulation without having sufficient certainty about the Parliament’s take on directive-level regulation must have been a tricky task for the Commission.

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The insurance sector would not regret to see
the IRRD face the same fate as the Evergreen ship at the Suez Canal –
measures copied from the banking sector
do little to solve problems in the insurance sector.
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However, the IRRD has not advanced as France hoped it would. The Commission’s IRRD proposal, published in September 2021, met strong resistance across Europe. Instead of finalising the directive, France had to settle for a progress report only. It remains to be seen how the Czech Republic, which will hold the Council presidency in the autumn, or Sweden, which will hold the presidency next spring, are going to navigate the ship through the headwinds. The insurance sector would not regret to see the IRRD face the same fate as the Evergreen ship at the Suez Canal – recovery and resolution measures copied from the banking sector do little to solve problems in the insurance sector, especially as the issues that the banking recovery and resolution was made for do not even exist in the insurance sector, i.e. there is no such thing as an insurance run.

Although the review process started off much slower at the Parliament than at the Council, it picked up speed briskly in early June 2022. Markus Ferber, the Parliament’s economic and monetary affairs (ECON) committee rapporteur on Solvency II and IRRD, published draft reports that provide a good basis for future regulation and are a step in the right direction. In the Solvency II draft report, the rapporteur has expanded the criteria for the undertakings to which the principle of proportionality applies, which could result in some Finnish insurers being eligible for reliefs under the proportionality principle. The draft report also suggests certain reliefs to reporting requirements. The basis of reporting is that the supervisor and consumers have different needs for reporting.

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It seems that the unnecessary IRRD proposal
is slowing down the necessary Solvency II amendments.
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Unlike the Council, the Parliament has followed the Commission’s original plan, and Solvency II and IRRD have proceeded hand in hand. The rapporteur’s IRRD draft report states that a proposal copied from the banking sector is not applicable to the insurance sector because of the differences between the sectors. However, despite the rapporteur stating that the IRRD is not applicable or necessary to the insurance sector, the rapporteur is nevertheless pushing a common insurance guarantee scheme in the EU.

All in all, it seems that the unnecessary IRRD proposal is slowing down the necessary Solvency II amendments. So, if the Parliament’s aim to handle both directive proposals at the same time is adhered to, the Solvency II review will be delayed. Should the Council struggle to form a general approach on the IRRD during the Czech presidency, the start of the trilogue negotiations between the Commission, the Council and the Parliament could be delayed until the Swedish presidency, if not even further.