The European Insurance and Occupational Pensions Authority (EIOPA) published today its technical advice on the implementation of the new proportionality framework under Solvency II, requested by the European Commission. This advice endorses the methodology for classifying insurance undertakings as ‘small and non-complex’, as outlined in the amended Solvency II Directive, and puts forward a set of conditions for granting similar proportionality measures to (re)insurers that do not classify as small and non-complex.
The recent review of the Solvency II Directive introduces a new proportionality framework to improve the effective application of proportionality principles in the prudential framework for European (re)insurers. For undertakings that can make use of them, these new rules will result in a reduction of several requirements (including governance and quantitative requirements), taking into account the nature, scale and complexity of the undertakings’ risk.
Small and non-complex undertakings
The revised proportionality framework, included the recently amended Solvency II Directive, sets clear criteria for identifying so-called ‘small and non-complex undertakings’ (SNCUs) that stand to benefit from proportionality measures following a simplified notification process to supervisors. In EIOPA’s view, the proposed methodology for classification is clear and comprehensive, needing no further specification at this stage.
Granting proportionality measures beyond SNCUs
In addition to SNCUs, the new proportionality regime also empowers supervisors to grant – and withdraw – similar concessions to other insurers whose risk profile justifies the use of some proportionality measures even though they do not classify as small and non-complex.
To guide the supervisory assessment regarding the granting and withdrawal of proportionality measures to non-SNCUs, EIOPA’s advice suggests a combination of quantitative and qualitative conditions. Some of these relate to the undertaking’s ability to withstand current and future risks, the complexity of its business model, its governance structure, and the size of its balance sheet. EIOPA proposes introducing general conditions for assessing the overall risk profile of the undertaking as well as specific conditions tailored to the type of proportionality measures the (re)insurer is applying for.
EIOPA’s technical advice on Solvency II’s new proportionality framework marks an important step towards reducing the regulatory burden on undertakings in Europe’s insurance sector while maintaining a prudent approach to risk management. The introduction of tailored and proportionate elements to the regulation supports market diversity, competition and innovation while allowing supervisory authorities to allocate resources efficiently towards more complex firms with higher risk profiles.