This is important primarily in order to recognise strategic or unfavourable economic developments in other parts of the group and to be able to implement countermeasures in good time.

For this reason, there have been colleges of supervisors in place in the European Union for a good 16 years that are made up of employees of the competent supervisory authorities. This cooperation is now reaching a new level of quality with the launch of the new European supervisory regime Solvency II. This contribution provides an overview of the development of the colleges of supervisors, describes the status quo and examines the challenges that are associated with greater cooperation under Solvency II.

The Helsinki Protocol and financial crisis

The decision to establish colleges in Europe goes back to the Helsinki Protocol in 2000. This agreement was based on the Insurance Groups Directive in 1998. For the first time, this stated that supervisory authorities must communicate any information with each other that is required for the purposes of supervising a group. The Protocol stipulated that a Coordination Committee must be established for this purpose, and also defined its responsibilities and the chairmanship. These “CoCos” were the precursors to today’s colleges of supervisors at insurance groups, although they were more informal in character. They also only existed for a few of the largest insurance groups.

On behalf of the G20, the Financial Stability Board FSB examined how well the supervisory authorities cooperate on supervision of multinational company mergers in the financial sector in its appraisal of the causes of the 2007/2008 financial crisis. One important finding was that, even for the larger multinational undertakings, there were not colleges of supervisors in place for all of them. There was also a clear need for improvement in cooperation.

As a result, the structures were developed for colleges at the European level that are still in place today:

• CEIOPS , the precursor to the European Insurance Supervisory Authority EIOPA, initiated the steps to establish colleges for all insurance groups that have subsidiaries in the European Union member states and EEA countries.
• Among other things, EIOPA was tasked with making a contribution to “promoting and monitoring the efficient, effective and consistent functioning of the colleges of supervisors”¹⁾ when it was founded on 1 January 2011.
• A new statutory framework was developed for colleges of supervisors with the Solvency II and Omnibus II Directives, which has already been in force in Germany since 1 April 2015.

European regulations

Under the Solvency II Directive, the supervisory authorities of groups that do not operate exclusively in one Member State must be a member of the relevant college of supervisors. This applies both to the group supervisor that chairs the college, as well as to the authorities of the countries in which subsidiaries of the group have their registered office. The new supervisory regulations do not provide any option for refusing membership.

As such, the group supervisor, i.e. the authority responsible for group-wide supervision, is given a key function, while the other supervisory authorities are supposed to cooperate and work hand-in-hand with the group supervisor. Aside from cooperation and exchange of information between the members in certain areas, this also includes joint decisions, e.g. on internal models.

In October 2014, the European Commission adopted a Delegated Regulation which supplemented the regulations under the Solvency II Directive and which came into force on 18 January 2015, i.e. before the Solvency II Directive and the new Insurance Supervision Act. The Regulation is binding and applies directly in every Member State. It includes criteria that must be used in order to assess whether a branch should be considered to be significant, meaning that the supervisory authority responsible for it must be part of the college. It also includes provisions to be used for the coordination arrangements, for approving group-specific parameters and for the information to be exchanged on a systematic basis.²⁾

Role of EIOPA

By far the most wide-ranging rules on the operating principles of the colleges come from the European Insurance and Occupational Pensions Authority (EIOPA), which plays a decisive role in terms of the regulations and the work of the colleges of supervisors. Its tasks and responsibilities are defined in the directly applicable EIOPA Regulation .

In order for EIOPA to be capable of fulfilling its mission stated above of promoting and monitoring an efficient, effective and consistent functioning of the colleges of supervisors, it is supposed to be a full participant in the colleges, enabling them to streamline their procedures for functioning and exchanging information. For instance EIOPA is allowed to record and exchange relevant information, organise and coordinate stress tests and support supervisory activities in cooperation with the competent authorities in order to ensure that these operate effectively and efficiently. It may supervise the activities of the responsible authorities, call for additional guidance for a college or demand a meeting or additional agenda item within the scope of its powers.

EIOPA is also authorised to develop technical regulatory and implementation standards and to arbitrate disputes between the relevant supervisory authorities with binding effect. EIOPA can also take part in the activities of the colleges of supervisors with the aim of working towards harmonisation of supervisory practices. This includes on-site inspections carried out jointly by a minimum of two competent authorities.

Stipulations and assistance from EIOPA

EIOPA has set up a College Team in its Oversight Unit to develop technical standards, guiding principles and tools for colleges of supervisors together with the IGSC (Insurance Group Supervision Committee) Working Group. The 26 guidelines for the operational functioning of colleges are particularly significant here. These are aimed both at the group supervisors as well as the members and participants. There are guidelines related to establishing colleges, the tasks of the participants, holding the meeting (which must be held at least once per year), the exchange of information, the work schedule, joints local audits as well as the allocation or delegation of tasks.

The notes to the guidelines also include a very comprehensive formulation of a specimen coordination arrangement that can be adapted to the relevant college’s individual needs. This is because the Solvency II Directive stipulates that the group supervisor and the relevant supervisory authorities of each college must enter into a cooperation agreement. However, there is barely any content prescribed by law aside from the indication that the establishment and functioning of the college must be regulated in the agreement. The only stipulation is that the colleges must set out procedures for decision-making in relation to internal models and for capital add-ons for a group undertaking or the group itself as well as for determining the group supervisor, along with procedures for mutual consultation in order to form the coordination agreement, and in the event that a group does not meet the solvency capital requirements.

The Delegated Regulation of the European Commission also stipulates that the coordination agreements must be set out in writing. In relation to the going concern aspect and crisis situations, it also specifies the information that must be exchanged at a minimum and it specifies the content that the emergency plans must have.

Task of colleges under Solvency II

In the insurance industry, the college is often seen as a governing body that takes decisions. However, this is only true in the case of approvals for internal models and for centralised risk management. The college must come to a unanimous decision before the group supervisor is able to approve these.

Other than in these cases, the college plays a supporting role. The Solvency II Directive makes a clear distinction between the remit of group supervision and the supervision of the individual undertakings. According to this, there is only one authority responsible for group supervision in each case. The supervisory authority of the highest-level parent undertaking is generally the group supervisor. However, a different group supervisor may be determined upon request and with the consent of the other relevant supervisory authorities. The group supervisor is in a strong position: aside from coordinating tasks, it is also the chair of the college of supervisors and has the lead responsibility for the approval procedure and a final say on the internal model.

The college’s task is to support it in the group’s supervision. The supervisors of the solo undertakings must work closely together in supervising the insurance group. Solvency II defines concrete reciprocal duties to consult the relevant supervisory authorities, e.g. on changes in the shareholder structure, organisational or management structure of an insurance undertaking or group, on extensions to restructuring periods and on significant sanctions. Since the authorities responsible for supervising the solo undertakings receive comprehensive information through the exchange in the colleges, these are also useful in supervising the individual undertakings in addition to improving group-wide supervision.

Implementation in practice

Implementation of the new regulatory framework poses several challenges to the colleges in practice. The supervisory review process is supposed to be applied in such a way that the same competitive conditions prevail within the ambit of Solvency II. As such, insurance groups should not be at an advantage or disadvantage through the fact that they are only represented in one country instead of several.

Application of the new rules ought to be relatively unproblematic from a legal point of view: Solvency II was designed for the European Single Market. Aside from the comprehensive regulations under the Directive and the implementing regulation, there are therefore policies as well as a manual for supervisors on all essential aspects of the supervisory system. This is aimed at ensuring that the European supervisory authorities apply the rules in a uniform manner.

However, the issue of efficient structuring of the supervision is not so easy to solve initially: the more subsidiaries there are operating in different countries, the more interfaces there are between the various supervisory authorities. Certain supervisory processes that had previously been structured predominantly at national level now also need to be conceived, planned and implemented across national borders.

But the preconditions for this are still missing as a result of the major complexity of Solvency II at the European level, particularly in the technical area. There are therefore national stand-alone solutions at present, such as the encryption standards in electronic communication via e-mail and the use of shared electronic file storage on secure servers, with the key concept being “secure supervisory data cloud”. It is clear, therefore, that while the statutory Solvency II framework is taking on a European perspective, there are still significant options for greater efficiency with the cross border supervisory and technical processes resulting from this. EIOPA will play a key role in coordinating the solutions.

Outlook

The supervision of insurance groups takes on even greater significance with Solvency II than was the case with Solvency I. The tasks of the group supervisor in the college of supervisors, the duties of the solo supervisors to cooperate and the inclusion of EIOPA result in a different supervisory quality.

As such, the colleges of supervisors will change the work of the national supervisory authorities significantly. Whereas the national view was crucial before, a switch is now taking place to a European operating principle and perspective. Supervision is changing from a national to a European or global matter.

It is vital that the many cogs involved in supervision fit together perfectly if the transition to the new culture of supervision is going to function smoothly. Much also depends on how the supervisory authorities involved bring the new regulations to life. They cannot lose sight here of the goal of actually improving supervision in the manner intended by Solvency II.

Footnotes:

¹⁾ Article 21 subsection 1 EIOPA Regulation.

²⁾ The provision that for financial conglomerates the required cooperation must be provided by colleges can be found in section 4 subsection 5 of the Supervision of Financial Conglomerates Supervision Act that has been applicable since 27 June 2013.