EU rules concerning life insurance solvency

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• EU rules concerning life insurance solvency
• Workshop on EU Insurance Legislation, Istanbul
  23-24 June 2005
• Ulf Linder
• European Commission

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INTERNAL MARKET FOR FINANCIAL SERVICES

Minimum Coordination of financial and prudential
rules of financial activities
EUROPEAN PASSPORT AND HOME COUNTRY CONTROL
Mutual recognition of supervisory systems
Single authorization and supervision by Home
Member State
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• Focus on financial requirements, but solvency in
  the broader sense is also about qualitative
  measures.
• For this presentation
• Establishment of technical provisions
• Investment rules
• Solvency margins and minimum guarantee funds
  (non-life - life)

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• EU financial supervision rules
• General principles
• minimum harmonisation
• accept national differences / mutual recognition

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• Establishment of technical provisions

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• Technical provisions
• should be adequate in respect of the entire
  business of the company
• provision for unearned premiums, life assurance
  provision, claims outstanding, equalisation
  provision, and other technical provisions
• generally set in a conservative way

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• Calculation basis for technical provisions
• case by case calculations
• estimated ultimate cost
• set in order to ensure that there is not adverse
  run off
• best estimate
• Different traditions exist in Member States

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• Life assurance technical provisions
• every assurance undertaking should establish
  sufficient technical provisions, including
  mathematical provisions in respect of its entire
  business
• the amount of the life technical provisions shall
  be calculated by a sufficiently prudent
  prospective valuation the interest rate,
  statistical elements and allowances for costs
  should be chosen prudently

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• Requirements only for assets covering technical
  provisions
• General principleassets covering the technical
  provisions shall take account of the type of
  business carried out by an undertaking in such a
  way as to secure the safety, yield and
  marketability of its investment, which the
  undertaking shall ensure are diversified and
  adequately spread

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• List of admissible assets
• A. Investments
• (a) debt securities, bonds and other money and
  capital market instruments
• (b) loans
• (c) shares and other variable yield
  participations
• (d) units in undertakings for collective investm
  ent in transferable securities and other
  investment funds
• (e) land, buildings and immovable property
  rights

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• List of admissible assets (cont)B. Debts and
  claims
• (f) debts owed by reinsurers, including
  reinsurers' shares of technical provisions
• (g) deposits with and debts owed by ceding
  undertakings
• (h) debts owed by policyholders and
  intermediaries arising out of direct and
  reinsurance operations
• (i) claims arising out of salvage and
  subrogation
• (j) tax recoveries
• (k) claims against guarantee funds

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• List of admissible assets (cont)C. Others
• (l) tangible fixed assets, other than land and
  buildings, valued on the basis of prudent
  amortisation
• (m) cash at bank and in hand, deposits with
  credit institutions and any other bodies
  authorised to receive deposits
• (n) deferred acquisition costs
• (o) accrued interest and rent, other accrued
  income and prepayments

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• Rules for investment diversification
• The home Member State shall require every
  assurance undertaking to invest no more than
• (a) 10 of its total gross technical provisions
  in any one piece of land or building,
• (b) 5 of its total gross technical provisions in
  shares and other negotiable securities treated
  from the same undertaking,
• (c) 5 of its total gross technical provisions in
  unsecured loans,
• (d) 3 of its total gross technical provisions in
  the form of cash in hand
• (e) 10 of its total gross technical provisions
  in shares and other securities not traded on a
  regulated market.

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• Rules for currency matching
• The commitments are considered to be payable in
  the same currency in which the contract is
  expressed.
• Insurance undertakings may hold non-matching
  assets to cover an amount not exceeding 20 of
  their commitments in a particular currency.
• Exceptions exist if the currency if the currency
  is subject to transfer restrictions.

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• Solvency margins and minimum guarantee fund (life)

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• Available solvency margin
• Every insurance undertaking is required to
  establish an available solvency margin in respect
  of its entire business.
• The solvency margin shall correpond to the assets
  of the undertaking free of any forseeable
  liabilities less any intangible item.
• Detailed rules of assets that can be included in
  the available solvency margin

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• Minimum solvency margin
• The required solvency margin is equal to the sum
  of two results.
• The first relates to mathematical provisions.
• The second relates to policies where the policy
  holder bear the investment risk.

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• The minimum solvency margin calculation
• First result
• a 4 fraction of the mathematical provisions,
  relating to direct business and reinsurance
  acceptance gross of reinsurance cessions shall be
  multiplied by the ratio, for the last financial
  year, of the total mathematical provisions net of
  reinsurance cessions to the gross total
  mathematical provisions. That ratio may in no
  case be less than 85.

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• The minimum solvency margin calculation (cont)
• (b) Second result
• for policies on which the capital at risk is not
  a negative figure, a 0,3 fraction of such
  capital underwritten by the assurance undertaking
  shall be multiplied by the ratio, for the last
  financial year, of the total capital at risk
  retained as the undertaking's liability after
  reinsurance cessions and retrocessions to the
  total capital at risk gross of reinsurance that
  ratio may in no case be less than 50.

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• The minimum guarantee fund
• One third of the required solvency margin shall
  constitute the guarantee fund
• No less than EUR 3 million
• Member States may provide for a one fourth
  reduction of the minimum guarantee fund in the
  case of mutuals.

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Contacts

• Ulf Linder, Principal Administrator
• Insurance Unit
• Internal Market DG
• European Commission
• 200 rue de la Loi, B-1049 Brussels, Belgium
• ? 32-2-299.22.76
• Fax [phone]
• E-mail ulf.linder_at_cec.eu.int
• Internal Market DG sitehttp//europa.eu.int/com
  m/internal_market/en/finances/insur/index.htm