On 30 October, the Council of Ministers approved and sent to the Council of State for advice a preliminary draft act to modernise the prudential control of insurance and reinsurance undertakings. This draft act is intended to implement into Belgian law Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 ("Solvency II"), as modified by Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 ("Omnibus II").
The new act should enter into force on 1 January 2016 at the latest in order to comply with the directive.
Background
Before the adoption of the Solvency II Directive, prudential control of insurance and reinsurance undertakings was based on a set of thirteen directives. This regime, called "Solvency I", was mainly implemented into Belgian law in the act of 9 July 1975 on the supervision of insurance undertakings, the royal decree of 22 February 1991 on general regulation regarding the supervision of insurance undertakings, and the act of 16 February 2009 on reinsurance.
The financial aspects of the Solvency I regime were articulated, in a cursory fashion, around three points:
- insurance and reinsurance undertakings had to make technical provisions, corresponding to the obligations of the insurer towards the policyholders;
- own funds had to attain a minimum threshold, the so-called solvency margin; and
- insurance and reinsurance undertakings had to set up a guarantee fund.
Solvency II regime
Directive 2009/138/CE of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance ("Solvency II") profoundly changed this regime, following, originally, the example of Basel II, which applied to banks. The Solvency II Directive repealed and replaced the various directives of the Solvency I regime.
The Solvency II regime essentially rests on three pillars:
- quantitative requirements (the calculation of technical provisions and own funds and the rules relating to valuation of the assets);
- qualitative requirements (internal risk management and supervision); and
- transparency and disclosure of information with regard to the supervisory authority and the public (reporting).
Implementation of Solvency II must take place before 1 January 2016 at the latest. In the meantime, during a long preparatory phase, the insurance and reinsurance undertakings already had to respond to QIS ("Quantitative Impact Studies") to measure the impact of the new rules on the balance sheet. Moreover, possibilities of pre-application of the new regime were instituted, subject to the prior authorisation of the National Bank of Belgium ("NBB").
Preliminary draft act
On 30 October 2015, a preliminary draft act on the status and supervision of insurance and reinsurance undertakings was approved by the Council of Ministers and was sent to the Council of State for advice. Its purpose is to implement the rules of Solvency II into Belgian law.
Some of the rules relating to consumer protection have already been implemented in the act of 4 April 2014 regarding insurance, while rules with respect to governance of insurance undertakings have been enacted by means of an act of 25 April 2015 containing various provisions.
As regards the content of this draft act, the legislator did not use the option in the directive allowing Member States to exempt very small insurance undertakings, but it plans for a level of supervision adapted to their size and their low risks.
Moreover, the draft act maintains, in the event of the winding-up of an insurance or reinsurance company, the priority ranking of the claims of policyholders on the assets representing the technical provisions, as well as the subsidiary priority of their claims on the whole of the assets of the insurance undertaking. However, the ranking of this second priority will be enhanced.
Further, the main innovations of this draft act relate to the operating conditions of the insurance or reinsurance activity (e.g. governance and risk management).
General operating conditions
All insurance and reinsurance undertakings will have to conduct an internal risk and solvency assessment ("ORSA" – Own risk and solvency assessment) every year and communicate the results to the NBB.
Regulatory standards and obligations
The draft act introduces an important change to the rules relating to the valuation of assets of insurance and reinsurance undertakings, since it provides for the principle of valuation of all assets and liabilities (including technical provisions) at market value, or, where required, at transfer value.
With regard to own funds, the concepts of "solvency margin" and "guarantee fund" of the Solvency I regime have been replaced by the concepts of solvency capital requirement ("SCR") and minimum capital requirement ("MCR"). In the draft act, the solvency capital requirement can be calculated, at the company's choice, using a standard formula or an internal model approved beforehand by the NBB. By contrast, only the standard formula may be used for the quarterly calculation of the minimum capital requirement until 31 December 2017. After that date, it will also be possible for insurance and reinsurance undertakings to use an internal model.
In addition, with respect to investments, the draft act envisages the application of the prudent person principle, resulting in a genuine break with the prior regime, which regulated the nature of and the quotas for these investments.
Recovery plans
The draft act gives the NBB the possibility of requiring certain insurance or reinsurance undertakings to establish a recovery plan that can be executed in the event of significant deterioration in their financial situation. Such a plan would have to be submitted to the NBB for approval.