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Brussels, 14th February 2002

Insurance: Commission welcomes rapid adoption of Directives to strengthen protection of policyholders

The European Commission has welcomed the adoption by the Council of Ministers on 14th February of two Directives to reinforce safeguards for policyholders by strengthening the solvency margin requirements for life and non-life assurance undertakings. The solvency margin is the extra capital that insurance providers are required to hold as a buffer against unforeseen events such as higher than expected claims levels or unfavourable investment results. These proposals are priority measures under the Financial Services Action Plan (see IP/00/556) to create a single, integrated financial services market by 2005. The Directives could be adopted by the Council without the need for a second reading in the European Parliament, as the Council was able to endorse the amendments sought by the Parliament at its first reading. The Directives must be implemented by Member States within 18 months of their publication in the EU's Official Journal (although there are transitional arrangements for certain measures) and applied to accounts for financial years beginning on 1 January 2004 or during 2004.

Internal Market Commissioner Frits Bolkestein said: "These solvency margin Directives will significantly increase security for policyholders. I am very pleased that the Directives have been adopted less than sixteen months after we proposed them. This is a further demonstration of what can be achieved through constructive dialogue and effective cooperation between the European Parliament, the Council and the Commission. However, recent events have dramatically shown how consumers and their insurers may face totally new risks. Now that these Directives are adopted, we are going ahead with a complete review of the overall financial position of insurance undertakings. This is a major exercise, whose objectives parallel those of the revision of the Basel Capital Accord."

The two Directives improve the existing rules for the calculation of the solvency margin requirement for insurance undertakings. The solvency margin is the minimum amount of extra capital that an insurance provider must have to fall back on in unforeseen circumstances.

Many features are common to both Directives, one of which covers life assurance, the other non-life insurance. Together they represent a package of measures applying to all insurance organisations qualifying under the EU Insurance Directives for a 'single passport', which allows them to sell policies anywhere in the EU on the basis of the supervision carried out by their home Member State. The proposals significantly strengthen and improve the current rules that date back to 1973 (non-life) and 1979 (life) respectively. Under the Directives:

  • to take account of specific local risks, Member States will be free to establish more stringent rules than the harmonised solvency ratio rules laid down in the Directives

  • the absolute minimum amounts of capital required (the so-called minimum guarantee fund) are substantially increased and will be indexed in future in line with inflation. The new absolute minimum would be set at €3 million (€2 million for some classes of non-life insurance) compared to the previous amounts which ranged between € 200 000 and € 1.4 million

  • the thresholds based on levels of premiums and claims below which a higher solvency margin is required have also been increased. The required solvency margin on a premium basis will now be 18 % up to the first € 50 million of premium this figure has been increased from €10 million and will be indexed in future - and 16 % above € 50 million. On a claims basis, the margin will be 26 % on the first € 35 million, up from €7 million and also indexed in future, and 23 % above € 35 million

  • supervisory bodies will now have increased powers to intervene early to take remedial action where policyholders' interests are threatened. For example, in a situation where an insurance undertaking currently satisfied the solvency margin requirements, but its financial position was deteriorating rapidly, the supervisor will now be able to take action

  • for certain categories of non-life business which have a particularly volatile risk profile (marine, aviation and general liability), the required solvency margin will be increased by 50%. Apart from reinforcing solvency requirements, the objective is to better match regulatory capital requirements to the real risk profile of the undertaking.

The insurance solvency margin Directives were proposed by the Commission in October 2000 (see IP/00/1233). In July 2001, the plenary session of the European Parliament fully endorsed the proposals but called for a number of technical amendments to increase transparency and clarity. These amendments were acceptable to the Commission and unanimously endorsed by the Council. The timetable for adoption of the Directives under the Financial Services Action Plan is end 2002, so the Directives have been adopted well ahead of schedule.

The two Directives focus on improving the existing rules for the calculation of the solvency margin requirement. They concentrate essentially on one, albeit important, aspect of the financial position of an insurance undertaking. Now that the Directives are adopted, the Commission is undertaking a major, sustained project (called Solvency II), which will look at the overall financial position of an insurance undertaking.


The existing solvency margin requirements were established in 1973 under the First Non-Life Directive (73/239/EEC) and in 1979 under the First Life Directive (79/267/EEC). The third generation of life (92/96/EEC) and non-life (92/49/EEC) Insurance Directives established the single market for insurance in the mid-1990s. This gave the EU one of the most competitive insurance markets in the world. Insurance undertakings, on the basis of authorisation in any one Member State, are entitled to sell throughout the EU without any price control or prior notification of terms and conditions (except for compulsory insurance). Under this 'single passport' system, insurance undertakings authorised by prudential authorities in one Member State can sell into another Member State, either directly (e.g. by telephone or internet), or by setting up a branch or a subsidiary there.

This system relies on mutual recognition of the supervision exercised by different national authorities according to rules harmonised to the extent necessary at the EU level. The requirement for insurance undertakings to establish an adequate solvency margin is one of the most important common prudential rules. The two new Directive improve the existing rules in this respect.

The Solvency II exercise is a more-wide ranging review which in addition may consider more sophisticated approaches to solvency. It will examine among other things: the rules governing the assets and liabilities of insurance undertakings; the matching of assets to liabilities; reinsurance arrangements; and the implications of accounting and actuarial policies. The objective will be to match solvency requirements better to the true risk encountered by an insurance undertaking and to encourage insurers to improve their measurement and monitoring of the risks they incur.

Similarly to developments in the banking field, consideration will be given to the feasibility of using risk models to examine the aggregate risks faced by an insurance undertaking. The project has close links to accounting changes and the development of an EU framework for the prudential supervision of reinsurance undertakings.

The Commission and Member State experts have already started work on the Solvency II project and are consulting the industry closely. The exercise is very wide-ranging and will take several years. At the end of this period the Commission will consider if new proposals for a Directive should be made to further improve the prudential rules for insurance undertakings.

The full texts of the two Directives will be available at:

See also MEMO/02/26.

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