David Lewin, Managing Director
While state supervision is no cure for unexpected turbulences in the financial market, it remains an essential tool for the mitigation of financial crisis risks. The recent financial problems in Greece, Portugal, Italy, Ireland and Spain are likely to fuel the call for a well coordinated and strong financial supervision system within the European Union (EU). This is also true in the insurance market, where players invested in mispriced government bonds and are now busy disposing of them.
After the financial crisis of 2008, the European Commission saw that it was crucial to foster closer cooperation among national supervision authorities, since nationally-based supervision had not been able to keep up with financial globalization.
In November 2008, as a first reaction to the recent financial crisis, the European Commission created a high-level group to develop ideas for strengthening EU supervisory arrangements in the financial sector. In its final report, dated February 25, 2009, this group proposed restructuring the entire EU supervisory institutions architecture. The purpose was to create an integrated monitoring panel for financial services, including (re)insurance companies. The European Council decided to make the appropriate amendments to EU legislation surprisingly quickly, on June 19, 2009.
Since then, the EU institutional framework for the supervision of insurance companies has changed considerably. The European Insurance and Occupational Pensions Authority (EIOPA) came into existence on January 1, 2011, and is one of three European Supervisory Authorities (ESAs) created in addition to the new European Systemic Risk Board (ESRB). These new watchdogs replace the former European Committees for the banking, securities and insurance and occupational pensions sectors. They have been given extended control powers designed to facilitate more effective financial supervision.
EIOPA succeeds the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and works alongside the new European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). By cooperating with national authorities, EIOPA monitors developments in the market and works to detect threats to fnancial stability as early as possible.
Legal Framework, Tasks and Powers
EIOPA has taken over CEIOPS’s functions, including drafting regulatory technical standards, general guidelines for the supervision of the insurance market and proposals to national supervision authorities in case of non-compliance with EU law. EIOPA also conducts peer reviews to ensure the consistent application of existing and future technical EU rules in the insurance and occupational pensions sector.
Unlike CEIOPS, though, EIOPA is not limited to an advisory or consultative role. Its powers include individual binding decisions, as provided for in Regulation (EU) No. 1094/2010 of November 24, 2010, the legal framework of the new authority (EIOPA Regulation, the Regulation). Such decisions may be addressed to national supervision authorities and even to individual financial institutions.
In certain emergency situations in the financial markets, the existence of which has to be determined by the European Council, EIOPA may adopt individual decisions requiring the competent national authorities to take action (Article 18 (3) of the Regulation). In case of non-compliance by a national authority, decisions may be addressed to individual financial institutions, with an extreme example being the cessation of any practice (Article 18 (4)).
When a dispute between several national authorities arises and an agreement cannot be reached, EIOPA may make binding decisions for the authorities concerned to ensure compliance with EU law (Article 19 (3)), and where appropriate, for financial institutions (Article 19 (4)). Finally, if a national authority fails to comply with its obligations under EU law and is reluctant to take necessary action in due time, EIOPA can adopt individual decisions addressed to financial institutions, if the relevant EU provisions are directly applicable to them (Article 17 (6)).
Time will reveal the full impact and relevance of EIOPA’s new powers. National authorities and financial hegemonies have been advocating for the maintenance of their autonomy as EIOPA developed. Therefore, EIOPA currently works within strict conditions to make use of its discretionary powers.
EIOPA is designed as an authority with legal personality (Article 5 (1) of the Regulation), meaning that it may have its own rights and obligations. Its main decision-making body is the Board of Supervisors (Article 40 of the Regulation), comprising representatives of the national supervisory authority in each EU Member State (in the case of Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). The Board of Supervisors adopts all opinions, recommendations and decisions issued by EIO PA on the basis of an annual work program (Article 43 (2), (4)).
In January 2011, the Board elected Gabriel Bernardino, of Portugal, to represent the authority as non-voting chairman for a term of five years. Mr. Bernardino is joined by the Spanish Executive Director Carlos Montalvo, who is in charge of the management and implementation of EIOPA’s annual work program.
The Management Board is responsible for all executive work. Its members are the Chairman, six representatives of national supervisory authorities and a representative of the European Commission. Currently, this Board consists of representatives from Austria, Ireland, Poland, Italy, the Netherlands and the United Kingdom. The Management Board proposes the annual work program and exercises budgetary power (Article 47 of the Regulation).
Finally, the architecture of EIO PA includes a Board of Appeal for remedies against EIO PA’s decisions (Articles 58 and 60 of the Regulation). Like its predecessor CEIOPS, EIOPA has its seat in Frankfurt am Main.
An unusual feature of the new ESA structure is that authorities are supplemented by stakeholder groups in order to include consultations with concerned private actors. EIOPA, according to Article 37 of the Regulation, hosts two such groups: one for insurance and reinsurance and another for occupational pensions. The insurance and reinsurance group has 30 members, with 10 of them representing insurance, reinsurance and insurance intermediary companies. It is chaired by Michaela Koller, of Germany. She is Director General of the CEA, the European insurance and reinsurance federation.
Having only advisory powers under the EIOPA provisions, this insurance and reinsurance group still gives stakeholders sufficient opportunity to express their interests. It meets at least four times per year and at least twice with representatives of the Board of S upervisors. EIOPA and the European Commission ask the group to provide its opinions regarding insurance-related regulatory technical standards, the implementation of technical standards and EIOPA’s guidelines and recommendations.
Beyond the right to be heard, the stakeholder group is free to inform EIO PA about possible breaches of EU law and request that EIOPA investigate these. At any time, the group may submit its opinions about EIOPA’s actions toward a common supervisory culture to any peer review of competent authorities and assessment of market developments. The authority is requested to publish any opinion and advice of the stakeholders.
The influence of this group remains to be seen.
The institutional change corresponds to further harmonization of substantive insurance supervision law within the EU. EIOPA will supervise the implementation of these new provisions within the member states in order to achieve a fully coordinated EU supervision structure. One of the top issues on EIOPA’s agenda, in this respect, is to make European insurance companies fit with the equity provisions of the Solvency II Directive, which becomes effective in 2013.
Recently, EIOPA announced that around 90 percent of European (re)insurers have met minimum solvency requirements and passed its second stress test carried out in June. The test was meant to detect how insurance ompanies would handle different degrees of macroeconomic crisis under Solvency II terms. It has been argued that these tests did not reflect the possible emergence of a national bankruptcy within the EU , even as that scenario became more and more of a reality. However, the test and its results still allowed EIOPA to make a clear statement to member states and to the market.
From an overall perspective, national authorities that focus on the supervision of financial markets will face more than implementation challenges as the substantive supervision legislation is harmonized within the EU. They may have to accept a subsequent transition, including discretional power shifts to the EU level, which may have significant consequences for concerned sectors, including the insurance industry. However, this process advances the involvement of stakeholders.(Re)insurance companies are well advised to provide adequate and dedicated input during this process to make their positions known.
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David Lewin, Managing Director