Proportionality [EU]
The European Commission’s proposals are:
Following its public consultation, the European Commission considered that the principle of proportionality (Recital 19) should be improved to enable more small insurers to be exempted from the Solvency II rules and for a more suitable framework created to cover insurers with a low-risk profile.
Proposed amendments:
Size thresholds for exclusion from scope of Solvency II (Article 4)
- the undertaking's annual gross written premium is increased from Eur 5 million to Eur 15 million.
- as regards technical provisions, the ceiling is raised from Eur 25 million to Eur 50 million.
General principles of supervision (Article 29) is amended to clarify the applicability of the proportionality principle with respect to delegated and implementing acts and introduces a new category of ‘low-risk profile undertakings’.
New Article 29a sets out criteria for identifying low-risk profile undertakings as being:
- Life insurers:
- Interest rate risk submodule is not higher than 5% of technical provisions
- Business underwritten in other member states other than the home member state is not higher than 5% of its total annual gross written premium
- Technical provisions are not higher than Eur 1000 million
- Investment in non-traditional investments do not represent more than 20% of total investments
- Reinsurance business is below 50% of annual total gross written premium
- Non-life insurers:
- Average combined ratio of the last 3 years is below 100%
- Business underwritten in other member states other than the home member state is not higher than 5% of its total annual gross written premium
- Annual gross written premium below Eur 100 million
- Investment in non-traditional investments do not represent more than 20% of total investments
- Reinsurance business is below 50% of annual total gross written premium
- The sum of the annual premiums of classes related to vehicles, credit and surety risks must not exceed 30% of the total premiums of the non-life business.
- For insurers combining life and non-life business the requirements shall be the sum of the above.
- Certain insurers and reinsurers will never be classified as low-risk profile undertakings:
- Those using partial or full internal model to calculate solvency capital requirement;
- Parent companies of an insurance group.
New Article 29b sets out the process of classification for low-risk profile undertakings.
New Article 29c sets out those proportionality measures ‘automatically’ available to low-risk profile undertakings and establishes the rules in case of change of the risk profile.
New Article 29d sets out how undertakings not classified as low-risk profile can be authorized to use proportionality measures.
New Article 29e sets out reporting obligations for the low-risk profile undertakings.
New Article 213a establishes the criteria for identifying low-risk profile groups and sets out the rules for the use of proportionality measures by such groups.
New paragraph 2a in Article 41 allows low-risk profile undertakings to assign one person to hold several key functions and provides proportionality measures in relation to governance rules. The internal policies listed in Article 41(3) need to be only updated every 3 years (instead of annually).
Article 45 is amended to allow low-risk profile undertakings, captive insurance undertakings and captive reinsurance undertakings meeting certain criteria to carry out their own risk and solvency assessment (ORSA) at least every 2 years (instead of annually).
Article 77 is amended to allow the use of prudent deterministic valuation of best estimate for life obligations with options and guarantees not deemed material instead of the use of stochastic valuation techniques.
New Article 109 introduces simplifications in the standard formula when a risk module or submodule is not material, provided that certain criteria are met.
For UK proposals see Topic - Thresholds [UK]