Solvency of Insurance Undertakings and Financial Groups
January
Solvency of Insurance Undertakings and Financial Groups
by Norbert Konrath 0
0 Director, Allianz Versicherungs AG , Munich
Having launched the single European Insurance Market mainly through the Third Directives, the European Insurance Legislator now focusses on solvency matters with three major European Commission projects. ist, a directive on the supplementary supervision of insurance undertakings in an insurance group. 2nd, a directive on the supervision of financial conglomerates, i.e. groups of insurance undertakings with banks or other financial firms.
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is reduced by the percentage that reinsurers contributed to the claims cost in the year of
account up to a maximum of 50%. The claims index is 26% of the first 7 million Units of
Account - and 23% of the remainder - of the average of the gross claims of the last three
financial years or seven years in the case of natural catastrophes, again reduced for
reinsurance similarly to the premium index. For health insurance practised on a similar basis to
life assurance both indexed results are reduced by one third. As stated, the higher of the
amounts calculated on the two indices is the relevant solvency margin.
A property and casualty insurance undertaking must have "free of all foreseeable
liabilities, less any intangible items" of the amount of this solvency requirement. The term
"assets" is to be interpreted, not in the sense of the accountancy conventions, but in the
sense of appropriate free resources available to meet losses. Article 16 (1) of the First
Nonlife Coordination Directive as replaced by Article 24 of the Third Non-life Coordination
Directive sets out, in an illustrative "catalogue", the following abbreviated items:
The paid up share capital or, in the case of a mutual insurance undertaking, the
effective initial fund,
one-half of the unpaid share capital or initial fund once the paid up part amounts to
25% of that share capital or fund,
reserves (statutory reserves and free reserves) not corresponding to underwriting
liabilities,
- any profits brought forward,
in the case of a mutual-type association, one-half of the allowable supplementary
contributions-type association in the financial year subject to a limit of 50% of the margin.
on request and with the agreement of the home country supervisory authority
responsible, any hidden reserves arising out of undervaluation of assets and finally, subject to
specified conditions and limitations and in accordance with member state options, a
further three items namely,
- subordinated loan capital,
- participating notes capital,
- preference share capital.
Most of these items are shown in the balance sheet - in the technical jargon "explicit".
Supplementary contributions and hidden reserves (the latter at any rate for the present) are
not shown in the balance sheet and are therefore termed "implicit". Intangible assets such
as amortised expenditure for the establishment or expansion of the concern and goodwill
are to be deducted from the total - explicit and implicit - assets.
The basis in European law governing the solvency system for life assurance is contained
in Articles 16 to 25 of the First Life Coordination Directive of 5.3.1979, in particular Article
18 (2), (1) (catalogue of free reserves) as amended by Article 25 of theThird Life
Coordination Directive of 10.11.1992.
The solvency requirements, laid down in the directive and incorporated in the national
law of the member states of the EU, apply to all life assurance undertakings, in particular
those conducting whole life or endowment assurance or annuities, with special provisions in
relation to term life insurance and index-linked assurances to which I only very briefly refer.
The basic solvency concept described for property and casualty insurance applies also
to life assurance, namely that every insurance undertaking should have a defined solvency
margin of free capital resources in addition to adequate technical insurance provisions, and
in this case particularly mathematical policy "reserves".
The solvency requirement for life assurance and annuity business is however
determined not by premiums and claims payments but by actuarial provisions and capital at risk, in
view of the nature of this business with its extensive transactions of saving and dissaving.
The minimum solvency margin is here the total - and not as in property and casualty
insurance the higher - of two amounts
4% of the gross mathematical "reserves" for the whole insurance business taking
account of reinsurance up to 15%
and
3% of the gross "capital at risk" for the whole insurance business taking account of
reinsurance up to 50%.
The mathematical "reserves", in particular the policy provisions are the reference value
for the investment risk and the "capital at risk" is the reference value for the mortality risk
being equal to the difference between the total sums insured and the accumulated premium
"reserves". In this connection it is significant (...truncated)