In January the EU Parliament and Council reached agreement on a set of amendments to the Solvency II Directive. The Parliament endorsed the proposals in April. It is anticipated the changes will be in operation by early 2026, writes Dick Roche.

The changes are wide-reaching. They strengthen supervisory powers over the insurance industry across a range of areas and enhance the role of the European Insurance and Occupational Pensions Authority (EIOPA).

While there have been protracted discussions on the proposals since they were published one important issue has, curiously, been overlooked  – the fitness of EIOPA to fulfil the enhanced role that it will have when the proposed changes take effect.  
 

EIOPA vs the national bank of Slovakia 

In July 2021 EIOPA issued a Recommendation  to the National Bank of Slovakia  (NBS), the authority which regulates Slovakia’s insurance industry,  requiring it to take action “against an (insurance) undertaking which pursues cross-border business in several countries.” 

The company in question, which was not identified by EIOPA sold life insurance in, Czechia, Austria, Germany, Hungary, Poland, Italy, and Iceland, in addition to its customers in Slovakia.

EIOPA took the view that the company was operating in breach of Solvency II requirements and that it should lose its licence to operate if it continued to operate without meeting those requirements. 

NBS vigorously defended its position, indicated it viewed “the situation differently”, argued that its step-by-step approach was in compliance with principle-based Union law and that it was taking “other steps” to achieve the required changes by EIOPA.

In November 2021 EIOPA again contacted NBS and noting that it had not taken the recommended actions declared NBS to be “non-compliant ” and instructed that it take the required supervisory actions.

On 16 May 2022, EIOPA issued a further Recommendation to NBS requesting it to “consider whether it has effectively exhausted the list of proportionate possible supervisory options” and gave it 45 days to act in line with EIOPA’s position. EIOPA made clear that the actions taken should “result in either a structural and sustainable recovery of all infringements or if appropriate or mandatory, a withdrawal of firm’s authorisation”.  To increase the pressure on NBS, EIOPA asked the European Commission to intervene.

In September 2022 the Commission adopted a formal opinion on the case. It concluded that the evidence collected by EIOPA in the case indicated that the insurance company had been “non-compliant over the past years with Solvency II. While noting that NBS had announced “an integrated supervisory strategy and initiated several supervisory actions” against the insurance company, the Commission stated that NBS had to go further.

Shortly after the EC issued its Formal Opinion, NBS announced it would revoke the licence of Novis. The company objected. On 1 June 2023 after seven months of lengthy internal wrangling NBS announced that it was withdrawing the authorisation of NOVIS to sell life insurance. A week later NBS petitioned the Commercial Court to appoint a liquidator and to commence liquidation proceedings against NOVIS.

The company requested the Administrative Court to review the decision of NBS arguing that it was laced with errors, ignored evidence that was presented, was based on a flawed assessment of facts and an incorrect application of the law.

Eighteen months on a liquidator has not been appointed. Both the Commercial and the Appeal Court decided to suspend the liquidation procedure until Slovakia’s Administrative Court decides on the legality of NBS’s licence decision.
 

Double standard

How the Commission, and EIOPA, viewed the role of NBS is strikingly different from the approach that both adopted in a case involving the Romanian Financial Supervisory Authority, ASF, and the Romanian subsidiary of the Bulgarian-headquartered Euroins Insurance Group, (EIG), one of the largest independent insurance groups in Central and Eastern Europe.  

In March 2023, in highly questionable circumstances ASF, withdrew the licence of Euroins Romania asserting that there was a deficiency in relation to the minimum capital requirements in the company. Less than four years earlier ASF put pressure on Euroins to take over Romania’s largest provider of motor insurance which was floundering.

The allegation about Euroins’ position was hotly contested. The Bulgarian Financial Supervision Commission, the European Bank for Reconstruction and Development (EBRD) and EIG challenged the position taken by ASF. ERBD made the point that if any of the deficiencies alleged by ASF existed they could be remedied. All of this fell on deaf ears.

When MEPs raised concerns about ASF, sought clarification on the approach adopted by EIOPA, looked for access to the material that informed its actions, or sought to have the accuracy of that material independently reviewed, the EU Commission took the view  that “day-to-day supervision (of an insurance operation) is the exclusive competence and responsibility of the national supervisory authorities.”

The positions taken by the Commission and EIOPA regarding the national regulators in the Euroins and NOVIS cases were diametrically opposite. The position taken by the Romanian regulator was seen as sacrosanct. A different standard was applied to the Slovak regulator.

Quite how this double standard can be explained would make it an interesting subject for parliamentary questions in the new Parliament.
 

Secrecy

While the approach adopted by EIOPA and the Commission in the two cases diverges on the role of the national competent authorities their position on transparency is identical in both cases.

EIOPA refused to allow the affected parties in both cases access to information.  In the Euroins case, it withheld material from the EU Parliament and even failed to share a report it prepared from the EU Commission.

 When NOVIS sought access to EIOPA documentation relating to its case it ran into a brick wall. EIOPA acknowledged that it had nine documents relevant to the case but refused access citing the need to protect possible court actions, to protect audits/investigations, and to protect its own decision-making procedures.

NOVIS appealed this to the European Supervisory Authorities Board of Appeal. The Board decided that EIOPA’s blanket refusal of access to documents was unacceptable and required EIOPA to make an amended decision.

On foot of the Board of Appeal decision EIOPA released only one document with over 80% of the text redacted, a hubris-ridden response that would be unlikely to go unpunished were it to happen in any Member State.  
 

Competence

Reviewing the performance of any insurance undertaking is by its nature complicated. Assumptions have to be made on key issues. It is critical that those assumptions are well based, otherwise the old adage, ‘garbage in garbage out applies’.

Two specific elements in EIOPA’s analysis in the NOVIS case raise questions – the assumption it used about the yearly future cancellation rate of the company’s insurance contracts and its assumption of yearly costs of servicing the company’s existing insurance contracts. Both have been vigorously contested and shown to be fundamentally flawed.

In the analysis EIOPA included an exceptionally high future cancellation rate of insurance contracts: it presumed that the cancellation rate for contracts from the 4th year onward should be above 20% annually, a figure that makes no sense.

When this was raised with NBS it stated in a document that the cancellation rate figure had been provided by the Italian Institute for the Supervision of Insurance.  Subsequently NBS admitted that the Italian regulator never provided Market data. EIOPA chose to ignore the clarification and continued to rely on the 20% figure in its claim that NOVIS did not fulfil its Minimal Capital Requirement (MCR). 

The second questionable assumption in EIOPA’s analysis concerns the annual cost of servicing existing contracts. EIOPA based its analysis on the assumption that the annual future cost attributable to each of the Slovakian company’s contracts was approximately €300.

Based on a 2021 benchmark study, Market Consistent Market-Consistent Expenses in European Life Insurance prepared by actuarial consultancy, Milliman, a more credible figure for the annual future for servicing existing contracts would be €70 or less. 

The combination of two extreme assumptions in EIOPA’s calculations fundamentally undermines its analysis and, by extension undermines the Formal Opinion that the Commission addressed to NBS in September 2022.

Reflecting the obduracy demonstrated in the Euroins case neither EIOPA nor the Commission, which was essentially ‘led and said’ by it, attempted to independently verify the data.

This does not inspire confidence in EIOPA and as suggested at the outset raises questions about EIOPA’s fitness to fulfil the enhanced role envisaged for it in the proposed Amendments to the Solvency II Directive. 
 

Enhancing EIOPA’s role while ignoring its deficiencies

In January 2024 the EU Parliament and Council reached agreement on a set of amendments to the Solvency II Directive. The proposed changes were approved by the Parliament in April. It is anticipated that the changes will be implemented in the first half of 2026.

The new requirements will include arrangements for the supervision of “significant cross-border (insurance) activities”.

Significant cross-border activities are defined as insurance or reinsurance activities carried out under the freedom of establishment or freedom to provide services by an undertaking, where the total annual gross written premium income exceeds €15 million, which is not a huge figure, or where the activities carried out are considered by the supervisory authority of the Member State into which the services are being sold as being of relevance to its domestic market.

These proposals align with EIOPA’s ambitions to have its role broadened in relation to cross-border insurance business.

Representatives of the insurance industry have unsurprisingly raised red flags regarding the proposed changes. They see them as an additional barrier to cross-border business and as putting limits on the freedom to provide services – a freedom enshrined in the founding treaties. They point to the focus on control rather than on the integration of the EU insurance market, to the fragmentation of the regulatory system, and to the consequences of additional regulatory burden on EU insurers.

The demonstrable lack of transparency and aversion to democratic oversight that has been a hallmark of EIOPA’s operations should be added to the list of concerns about the changes that are underway. 

In their rush to endow the Authority with significant additional supervisory reach, it is disturbing that EU lawmakers have chosen to ignore EIOPA’s failures in terms of transparency and accountability. That oversight needs to be addressed. 

Dick Roche is a former Irish Minister for European affairs and former minister for the environment. 

Source: https://www.eureporter.co/world/slovakia/2024/10/29/a-decision-eu-lawmakers-should-rethink/