Just one annual statement issued by an insurer under the Solvency II supervisory regime can contain up to 330,000 data fields, in addition to which the supervisory authority receives extensive quarterly and narrative reports. On top of that, insurers publish solvency and financial condition reports (SFCR) every year, accounting for in the region of 30,000 pages. According to a survey conducted by our association, no less than 97 percent of insurers consider the regulations to be overly complex. Who would have known?
The verdict two years after the start of Solvency II: the effort and expense of the supervisory regime often bear no relation to the risk. The requirements apply regardless of the company's solvency situation and risk profile – there are hardly any exceptions or forms of relief. This was not the original intention: the proportionality principle was explicitly included in the EU regulatory framework to lower the bureaucratic burden on lower-risk insurers.
This principle has effectively proved useless so far. The problem is that any exemptions for reasons of proportionality require an extensive burden of proof – and it is the companies themselves who have to justify their eligibility. This involves a lot of time and effort, which often defeats the purpose of obtaining the evidence in the first place.
Less bureaucracy is called for
We need less bureaucracy and three criteria must be met to achieve that.
The entire Solvency II regulatory framework should be reviewed regularly from a cost/benefit perspective. Any requirements that are shown to simply add bureaucracy while failing to provide adequate value for the supervisory authority or the companies must then be promptly removed. This should include a review of whether a requirement has proved useful in practice.
The question as to “how” requirements must be implemented in a specific instance should only be considered after a review to determine “whether” the requirements are, in the first instance, appropriate and necessary for the company from a risk perspective. The current supervisory procedure whereby proportionality simply determines “how” requirements can be implemented, not “whether” they should be implemented at all, has not proved fit for purpose.
More legal certainty through flexibility clauses
To the extent that simplified implementation is possible, the corresponding action points should be included directly in the regulation documents. This will enable BaFin to ensure legal certainty in the relevant circular for all parties involved and materially reduce the burden of proof. The aim must be to provide and guarantee the legitimacy of reporting options for companies and supervisors to ensure proportional solutions are not seen as being an exception.
Company-specific features of business models are unfortunately not adequately accounted for in supervisory practice. To find out more about the practical consequences for insurers, read the latest edition (LINK) of our magazine “Positionen” (only in German). Title: “Wer soll das stemmen?” (Who is supposed to manage?)
Jörg von Fürstenwerth