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Insurance Groups and Their Supervision

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Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation

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Abstract

Prior to the establishment of the single market in insurance services, insurance regulation and supervision were organized at national level. Insurers writing business in Europe were operating on the relatively small and isolated domestic insurance markets of various EU Member States under greatly differing regulatory requirements and supervisory practices. Given the high regulatory and administrative burdens these segregated markets imposed on cross-border activities, they were practically closed to international competition and dominated by solo companies rather than large international financial groups.

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Notes

  1. 1.

    For more on the concentration process taking place on the European insurance market see CEA (2006) [36] and CEA (2007) [38].

  2. 2.

    For a broader overview of issues regarding group-wide solvency assessment and supervision in the context of insurance groups refer to IAIS (2009) [68].

  3. 3.

    Colpan and Hikino (2010) [4], p. 17.

  4. 4.

    See for instance Goto (1982) [14], Yiu et al. (2007) [24], and Boyd and Hoskisson (2010) [1].

  5. 5.

    Colpan and Hikino (2010) [4], p. 18 et seq.

  6. 6.

    Both business groups and multi-unit enterprises are divided into further categories, which, however, will not be addressed here.

  7. 7.

    For more details on business groups see Colpan and Hikino (2010) [4], p. 15 et seq.

  8. 8.

    See the relevant definitions in Article 1 of the Third Life Directive [26], Third Non-Life Directive [25], and IGD [34], respectively.

  9. 9.

    Maier and Nielsen (2013) [21] provide a similar classification with slightly different nomenclature.

  10. 10.

    Article 212(1)(a) of the Solvency II Directive.

  11. 11.

    Article 13(15) of the Solvency II Directive, Article 1 of Directive 83/349/EEC.

  12. 12.

    Article 13(18) and (20) of the Solvency II Directive.

  13. 13.

    Article 212(1)(b) of the Solvency II Directive.

  14. 14.

    Article 13(16) of the Solvency II Directive, Article 1 of Directive 83/349/EEC.

  15. 15.

    Article 12(1) of Directive 83/349/EEC.

  16. 16.

    Recital 98 of the Preamble and Article 212(1)(c)(ii) of the Solvency II Directive.

  17. 17.

    Articles 1(2), 212(1)(f), (g), and 213 of the Solvency II Directive.

  18. 18.

    For an in-depth analysis of the various types of groups and the scope of group supervision see Maier and Nielsen (2013) [21] and Kraft (2015) [18].

  19. 19.

    Cerrutti et al. (2007) [3], Fiechter et al. (2011) [61], BIS (2012) [35], IAIS (2013) [67], and Geneva Association (GA) (2013) [70].

  20. 20.

    See Cerrutti et al. (2007) [3], Fiechter et al. (2011) [61], and IAIS (2013) [67], which acknowledges that these factors are likewise relevant in the insurance sector.

  21. 21.

    Cerutti et al. (2007) [3], p. 1670 et seq. and Fiechter et al. (2011) [61], p. 7 et seq.

  22. 22.

    See IAIS (2013) [67], p. 11.

  23. 23.

    Articles 145(2)(c) and 162(2)(d) of the Solvency II Directive.

  24. 24.

    Articles 145, 146, and 162(2)(i) of the Solvency II Directive.

  25. 25.

    Fiechter et al. (2011) [61], p. 7, fn. 4.

  26. 26.

    See IAIS (2013) [67], p. 5, et seq., Fiechter et al. (2011) [61], p. 8, which also highlights the 1990s post-crisis Eastern Asia as a counterexample, p. 11, and Cerutti et al. (2007) [3] p. 1686.

  27. 27.

    Article 146 (1) of the Solvency II Directive.

  28. 28.

    Articles 162(2)(e), (f), 165, and 166 of the Solvency II Directive.

  29. 29.

    Fiechter et al. (2011) [61], p. 5.

  30. 30.

    For more information see Fiechter et al. (2011) [61], p. 7 et seq.

  31. 31.

    For further details see Fiechter et al. (2011) [61], p. 7 et seq.

  32. 32.

    See IAIS (2013) [67], p. 19, et seq. and Fiechter et al. (2011) [61], p. 6 and 16 et seq.

  33. 33.

    Articles 145, 146, and 162–170 of the Solvency II Directive and CEA (2008a) [37], p. 6.

  34. 34.

    Cerutti et al. (2007) [3], p. 1670 and Fiechter et al. (2011) [61], p. 7.

  35. 35.

    See IAIS (2013) [67], p. 11.

  36. 36.

    Fiechter et al. (2011) [61], p. 7 et seq. and BIS (2012) [35], p. 6 et seq.

  37. 37.

    For more details see Article 236 et seq. of the Solvency II Directive and CEIOPS-DOC-62/09 [43].

  38. 38.

    BIS (2012) [35], p. 8 et seq.

  39. 39.

    Fiechter et al. (2011) [61], p. 7 et seq. and BIS (2012) [35], p. 6 et seq.

  40. 40.

    BIS (2012) [35], p. 14 et seq.

  41. 41.

    Fiechter et al. (2011) [61], p. 8 et seq., GA (2013) [70], p. 21, and BIS (2012) [35], p. 10 et seq.

  42. 42.

    For more information see Cerutti et al. (2007) [3], p. 1670 et seq., Fiechter et al. (2011) [61], p. 9, and BIS (2012) [35], p. 8 et seq.

  43. 43.

    For a deeper analysis refer to CEA (2008a) [37], p. 6. and Fiechter et al. (2011) [61], p. 16 et seq.

  44. 44.

    Fiechter et al. (2011) [61], p. 20 et seq., Cerutti et al. (2007) [3], p. 1691, GA (2013) [70], p. 33, and IAIS (2013) [67], p. 22.

  45. 45.

    See for instance the Turner Review (2009) [63], p. 38.

  46. 46.

    For further details regarding these conclusions see especially Fiechter et al. (2011) [61], p. 20 et seq., GA (2013) [70], p. 33, Lumpkin (2011) [20], p. 134., Goodhart (2011) [13], p. 152 et seq., Fonteyne et al. (2010) [62], p. 27 et seq., and Hüpkes (2009) [16], p. 377 et seq., the latter of which deems such a large-scale international harmonization unrealistic and suggests a simplification of group structures instead.

  47. 47.

    See the Preamble and Articles 15–17 of Directive 73/239/EC [27] and the Preamble and Articles 17–19 of Directive 79/267/EC [28].

  48. 48.

    See the comments on Article 7 in the Commission’s Proposals for the Third Non-Life [59] and Life [60] Directives.

  49. 49.

    Article 22(2)(iv) of Directives 92/49/EC [25] and 92/96/EC [26], respectively.

  50. 50.

    Directive 98/78/EC [34].

  51. 51.

    See the Helsinki Protocol [52], p. 2.

  52. 52.

    Article 8 IGD [34].

  53. 53.

    For further details see COM(95) 406 final [58] and Article 9 IGD [34].

  54. 54.

    See Articles 4(2), 6(3), 7(1), and 7(2) IGD [34].

  55. 55.

    See the Sienna Protocol (1997) [51] and the Revised Sienna Protocol (2008) [48] with further references.

  56. 56.

    Helsinki Protocol (2000) [52].

  57. 57.

    CEIOPS-DOC-02/05 [49].

  58. 58.

    For further details see the Helsinki Protocol (2000) [52] and CEIOPS-DOC-02/05 [49].

  59. 59.

    Article 5(1) IGD [34].

  60. 60.

    Article 9(3) IGD [34].

  61. 61.

    For more details about the shortcomings of the supervisory framework see CEIOPS-DOC-04/05 [50] and FSA (2006b) [66].

  62. 62.

    Directive 2002/87/EC [30].

  63. 63.

    Directive 2006/48/EC [31].

  64. 64.

    Notably in the FCD [30] and the CRD I package consisting of Directives 2006/48/EC [31] and 2006/49/EC [32].

  65. 65.

    COM(2007) 361 final [57] and COM(2008) 119 final [56].

  66. 66.

    Title III (Articles 212–266) of the Solvency II Directive.

  67. 67.

    Article 213(1) of the Solvency II Directive.

  68. 68.

    See Articles 213 and 214 of the Solvency II Directive, Maier and Nielsen (2013) [21], and Kraft (2015) [18].

  69. 69.

    Articles 215–217 of the Solvency II Directive.

  70. 70.

    COM(2008) 119 final [56].

  71. 71.

    Directive 2009/138/EC [33].

  72. 72.

    Title I, Chapter VI (Articles 75–135), but see also Recitals 95–109 of the Preamble of the Directive.

  73. 73.

    Articles 221–223 of the Directive.

  74. 74.

    Articles 44–245 of the Directive.

  75. 75.

    Articles 236–241 of the Directive.

  76. 76.

    Article 75 (1) of the Directive.

  77. 77.

    For more information see Recitals 15, 45, and 46 of the Preamble and Article 75 of the Directive and CEIOPS-DOC-31/09 [47].

  78. 78.

    Article 224 of the Directive.

  79. 79.

    For more details see Recitals 53–59 of the Preamble and Articles 76–86 and 137 of the Directive, Recitals 30–34 of the Preamble and Articles 75–85 and 135 of the Proposal, CEIOPS-DOC-07/05 [40], p. 175 et seq., and FSA (2006b) [66], p. 5 et seq.

  80. 80.

    See CEIOPS-DOC-52/09 [41], p. 51. as well as Recitals 129 and 130 of the Preamble and Articles 339 and 340 of Commission Delegated Regulation (EU) 2015/35 [29].

  81. 81.

    For more information on own funds see the Explanatory Memorandum p. 10 et seq. and Articles 86–99 of the Proposal as well as Recitals 47–52 of the Preamble and Articles 87–99 of the Directive.

  82. 82.

    Article 5 TEC.

  83. 83.

    CEIOPS-DOC-07/05 [40], p. 172.

  84. 84.

    Articles 98(4) and 100 of the Proposal and Articles 98(3) and 100 of the Directive.

  85. 85.

    Explanatory Memorandum p. 11 and Article 98 of the Proposal and Recital 47 and Article 98 of the Directive.

  86. 86.

    The VaR is a popular measure of financial risk developed in the 1990s. It specifies the maximum likely loss over a certain holding period at a given confidence level. Thus, 99. 5% VaR represents a 99. 5% certainty about not suffering a loss of such an extent so as to become insolvent within 1 year. For more details on VaR and other financial risk measurement tools see Dowd (2005) [6] and Hull (2012) [15].

  87. 87.

    For more details on the solo SCR see the Explanatory Memorandum, p. 11 et seq. and Articles 100–125 and 136 of the Proposal, Recitals 60–68 of the Preamble and Articles 100–127, 134, 136 and 138 of the Directive, and FSA (2006a) [65], p. 35 et seq.

  88. 88.

    See Article 228(2) second subparagraph of the Proposal and Article 230(2) second subparagraph of the Directive.

  89. 89.

    Articles 98(5) and 126 of the Proposal and Articles 98(4) and 128 of the Directive.

  90. 90.

    See the Explanatory Memorandum p. 13 and Articles 128–131 and 139 of the Proposal and Recitals 69 and 70 of the Preamble and Articles 128–131 of the Directive.

  91. 91.

    Explanatory Memorandum p. 13 of the Proposal and Recitals 71–75 of the Preamble and Articles 132–135 of the Directive.

  92. 92.

    See the ground-breaking work of Markowitz (1952) [22] in the field of modern portfolio theory.

  93. 93.

    Brealey et al. (2011) [2], p. 170 and 173 et seq.

  94. 94.

    Darlap and Mayr (2007) [5], p. 38.

  95. 95.

    Brealey et al. (2011) [2], p. 170 et seq.

  96. 96.

    See Kelly (1994) [17] and Brealey et al. (2011) [2], p. 163 et seq.

  97. 97.

    Kelly (1994) [17], p. 5 et seq.

  98. 98.

    Kelly (1994) [17], p. 11 et seq.

  99. 99.

    Clark (2013) [69].

  100. 100.

    Kelly (1994) [17], p. 279 et seq.

  101. 101.

    Kelly (1994) [17], p. 219 et seq.

  102. 102.

    Kelly (1994) [17], p. 261 et seq.

  103. 103.

    Kelly (1994) [17], p. 271 et seq.

  104. 104.

    For a more extensive overview of the above provided mathematical basics, including proofs, refer to the textbooks of Kelly (1994) [17] and Krengel (2005) [19].

  105. 105.

    The notions of fungibility and transferability will be defined in Chapter 5.

  106. 106.

    For further information on the issues around diversification see CEIOPS (2006) [39], p. 15 et seq., Darlap and Mayr (2007) [5], FSA (2008) [64], p. 9 et seq., IAIS (2009) [68], p. 20 et seq., CRO Forum (2005) [54], and CRO Forum (2013) [55].

  107. 107.

    For more details on the group SCR see the Explanatory Memorandum p. 14 and Articles 216–233 of the Proposal and Recitals 100–102 of the Preamble and Articles 218–235 of the Directive.

  108. 108.

    Articles 221–223 of the Directive.

  109. 109.

    Note that diversification effects manifesting within solo entities are already reflected in their solo SCR. For more information on the calculation of the group SCR, see CEIOPS-DOC-52/09 [41], p. 22 et seq.

  110. 110.

    See Article 228(2) second subparagraph of the Proposal and Article 230(2) second subparagraph of the Directive. For more on solvency control levels at solo and group level see CEIOPS-DOC-52/09 [41], p. 49 et seq. and CEIOPS-DOC-07/05 [40], p. 171 et seq. and 205 et seq.

  111. 111.

    Article 13(35) of the Directive.

  112. 112.

    Article 13(19) of the Directive.

  113. 113.

    Section 4.1.2.

  114. 114.

    Articles 376 and 377 of Commission Delegated Regulation (EU) 2015/35 [29].

  115. 115.

    See Recital 109 of the Preamble and Articles 244–246 of the Directive. For a broader overview on risk concentrations and intra-group transactions refer to CEIOPS-DOC-53/09 [44], IAIS (2009) [68], p. 20, and BIS (2012) [35].

  116. 116.

    See the Explanatory Memorandum p. 4 et seq. of the Proposal and Recitals 110–115 of the Preamble and Title I, Chapter III, and Sections 1 and 2 of Chapter IV (Articles 27–50) of the Directive.

  117. 117.

    Articles 247–259 of the Directive.

  118. 118.

    Articles 27 and 28 of the Directive.

  119. 119.

    Article 29 of the Directive.

  120. 120.

    Articles 30 and 33 of the Directive.

  121. 121.

    Articles 31, 34, 35, 38, and 39 of the Directive.

  122. 122.

    Article 36 of the Directive.

  123. 123.

    For a detailed explanation of the overall concept, objectives, and scope of the SRP see Dreher and Ballmeier (2015a) [12].

  124. 124.

    Article 37 of the Directive.

  125. 125.

    See also the Explanatory Memorandum p. 6, Articles 36, 37, and 230 of the Proposal, and CEIOPS-DOC-49/09 [42].

  126. 126.

    Article 40 of the Directive.

  127. 127.

    In particular the Sharma Report (2002) [53].

  128. 128.

    Article 41 of the Directive. For information on general governance requirements see CEIOPS-DOC-29/09 [46], p. 10 et seq.

  129. 129.

    Articles 42 and 43 of the Directive.

  130. 130.

    For more information on fit and proper requirements, the definition and holders of key functions, their supervision, and other related issues see CEIOPS-DOC-29/09 [46], p. 16 et seq., Dreher (2015a) [7], Dreher (2015b) [10], and Dreher (2015c) [9].

  131. 131.

    Article 44 of the Directive.

  132. 132.

    For further details see CEIOPS-DOC-29/09 [46], p. 19 et seq.

  133. 133.

    Article 45 of the Directive.

  134. 134.

    For an extensive discussion of the ORSA including a critical evaluation of its compatibility with the fundamental European freedom to conduct a business refer to Dreher and Ballmeier (2015b) [11].

  135. 135.

    Article 46 of the Directive.

  136. 136.

    For more information on internal control, in particular the compliance function, see CEIOPS-DOC-29/09 [46], p. 46 et seq. and Dreher (2015d) [8].

  137. 137.

    Article 47 of the Directive.

  138. 138.

    Pickett (2010) [23], p. 313.

  139. 139.

    For more information see CEIOPS-DOC-29/09 [46], p. 50 et seq.

  140. 140.

    Article 48 of the Directive.

  141. 141.

    For further details on the actuarial function refer to CEIOPS-DOC-29/09 [46], p. 53 et seq.

  142. 142.

    Article 49 of the Directive.

  143. 143.

    See also CEIOPS-DOC-29/09 [46], p. 63 et seq.

  144. 144.

    See Articles 246 and 257 of the Directive and CEIOPS-DOC-62/09 [43], p. 10 et seq.

  145. 145.

    Recital 113 of the Preamble of the Directive.

  146. 146.

    Article 247 of the Directive.

  147. 147.

    Article 248 of the Directive.

  148. 148.

    Article 258 of the Directive.

  149. 149.

    Article 211(1) Proposal, Article 213(1) Directive.

  150. 150.

    Article 231 of the Directive.

  151. 151.

    Article 235 of the Proposal.

  152. 152.

    Article 236 of the Proposal.

  153. 153.

    Article 237(3) of the Proposal.

  154. 154.

    Article 238 of the Proposal.

  155. 155.

    For more details on the allocation of responsibilities and the rational underlying those policy decisions see CEA (2008a) [37], p. 6 et seq.

  156. 156.

    Articles 249–255 of the Directive.

  157. 157.

    Articles 231(3) and 238(5) of the Directive.

  158. 158.

    See Articles 51–56 and 256 of the Directive and CEIOPS-DOC-50/09 [45].

  159. 159.

    Article 241 of the Proposal.

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    Olivia Johanna Erdélyi

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Erdélyi, O. (2016). Insurance Groups and Their Supervision. In: Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation. Springer, Cham. https://doi.org/10.1007/978-3-319-30707-7_4

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