Is it the end for group support under Solvency II? The linchpin of European insurance harmonisation could soon be back, writes David Banks.

It was supposed to be the document that made the European insurance industry more robust, more competitive and free from all the hassle of cross-border red tape.

Yet, at the final hurdle, Solvency II became a watered-down compromise.

As the directive approaches its formal adoption stage this month, it is lacking any mention of group support, previously seen as a key element in the quest for a single European insurance market. After opposition from some EU members, the component was dropped to ensure the remaining pages of the directive had a smooth ride through the European Parliament and European Council. The European Parliament approved the directive on 22 April.

Group support would have removed the need for a subsidiary of a European parent to hold onerous financial commitments in its country of operation. Its advocates, including the UK’s Financial Services Authority (FSA), say such a facility would have lowered the cost of regulatory capital, encouraged diversification and promoted the international competitiveness of EU insurers.

However, group supervision could still make a comeback. Amid the wrangling of politicians and the laments of a disappointed industry come the words of the Czech EU presidency, promising that group support could soon be back on the agenda: “Both institutions [the European Parliament and the

permanent representatives committee] have agreed not to include [group support] in the directive and come back to it in a few years.”

Observers also anticipate a form of group support “through the back door”, along the lines of one of the compromises initially considered, such as a national opt-in to form a college of supervisors and a mediation role for the European insurance supervisors’ committee, CEIOPS. Does this mean Solvency III will be discussed before Solvency II is enforced?

Opposition to group support came from national insurance supervisors who feared a loss of control to a “lead” regulator in a foreign land, which might protect its own country’s interests when times turn tough – a problem seen in banking.

Top of the agenda

Despite the compromise, Solvency II is still the most important piece of regulation for the European insurance industry. Industry groups including the International Underwriting Association, the CEA, the European insurance and reinsurance federation, Lloyd’s and the Association of British Insurers were satisfied that a consensus was reached at all.

Naren Persad, senior consultant at Tillinghast, the insurance consulting business of Towers Perrin, says group support and procyclicality were the two sticking points out of hundreds of pages. “Companies must appoint a senior member of management to take responsibility for Solvency II.

If it is the number three priority at the moment, it will move up to become the biggest thing on the agenda for insurance and reinsurance in the next couple of years.”

Persad, who has worked with insurers and the CEA to influence the formation of Solvency II, says companies have started to do more to ensure compliance by the time the directive becomes active in 2012.

“A lot have been looking from the sidelines waiting to see what would happen. In contrast, the UK market is a bit special and has moved quite a lot because the FSA has identified a lot of points it likes.”

David Banks is deputy editor of Global Reinsurance.