Solvency II – requirements for the activity and supervision of insurance and re-insurance undertakings
Solvency II – requirements for the activity and supervision of insurance and re-insurance undertakings, applicable as of 1 January 2016, replacing the Solvency I regime which had been in place before. The purpose of the Solvency II Directive is to ensure better consumer protection implementing risk-based capital requirements, own risk and solvency assessment, more detailed disclosure on the activity and financial condition, as well as conducting consistent supervision of insurers across the EU.
Goals, main functions of supervision and supervisory activities
The goals of the Bank of Lithuania in carrying out insurance market supervision is to ensure the credibility, efficiency, security and stability of the insurance system, as well as protection of the interests and rights of policyholders, insured persons, beneficiaries and injured third parties (hereinafter ‘consumers’).
The Bank of Lithuania, following EU directive requirements, international standards and best insurance supervisory practices, carries out supervision of insurance market participants, issues legal regulation of their activity, settles disputes between consumers and market participants, deals with complaints over their activities, and carries out oversight of market behaviour vis-à-vis consumers.
In the supervision of market participants, the Bank of Lithuania performs the following functions:
- controls whether insurance undertakings registered in the Republic of Lithuania and branches of insurance undertakings of other EU Member States comply with the requirements of legal acts regulating their activity and provision of services, as well as licensing terms and conditions; supervision is conducted off-site by analysing supervisory reporting and other information to be submitted to the supervisory authority and publicly available information, as well as on-site by carrying out inspections of undertakings;
- monitors financial condition of undertakings registered in the Republic of Lithuania taking into account the trends in the dynamics of macroeconomic indicators and potential financial market changes;
- verifies whether insurance undertakings registered in the Republic of Lithuania calculate their technical provisions, solvency capital requirement and minimum capital requirement in line with legal requirements; also, whether their own funds are appropriate quality and sufficient to cover capital requirements;
- assesses whether insurance undertakings registered in the Republic of Lithuania are prudent in investing funds, whether they have adequate risk and capital management procedures in place, and whether their management system is efficient;
- prepares thematic reviews (analyses) in order to ascertain whether insurance undertakings registered in the Republic of Lithuania and branches of insurance undertakings of other EU Member States are operating in a transparent and fair manner, whether their behaviour with consumers is fair and professional.
Financial supervision of branches of insurance undertakings of other EU Member States established in Lithuania (hereinafter ‘branches’) is carried out by the supervisory authorities of respective Member States in which the undertakings (founders of the branches) are registered. To have sufficient information on the financial situation of these undertakings, the Bank of Lithuania cooperates with their supervisory authorities.
While taking an active part in the formulation and implementation of state insurance and insurance supervisory policies, the Bank of Lithuania cooperates with state institutions, professional associations of insurers and insurance intermediaries, constantly informs the public on insurance market developments, analyses insurance market indicators, assesses and projects insurance market development trends.
Supervisory review process for insurance undertakings
The Bank of Lithuania follows a forward-looking, risk-based supervisory approach in the supervision of insurance undertakings registered in the Republic of Lithuania. The risk-based supervisory approach is grounded on the assumption that the business models of insurance undertakings are different and vary in the risk profiles, that different financial products pose a different risk to consumers. The Solvency II Directive, based on the principles of risk assessment, had a significant impact on the changed in the supervisory review process.
The goal of supervision – to ensure the credibility, efficiency, security and stability of the insurance system, protection of the interests and rights of policy holders, insured persons, beneficiaries and injured third persons (customers) – is achieved applying consistent and detailed analysis of each insurance undertaking’s business model risks and product risks as well as taking supervisory actions consistent with the risk profile of an insurance undertaking identified at the risk analysis stage.
The Bank of Lithuania aims at the earliest possible way to identify potential product risks to customers and threats to the business continuity of an insurance undertaking so that it would be possible to enter into a dialogue with the management of the insurance undertaking and to take necessary actions to protect the interests and rights of consumers, as well as to ensure smooth and sustainable development of the insurance market. In conducting supervision, the Bank of Lithuania aims at protecting the interests of policyholders, takes action to minimise the effects of insolvency of undertakings for the public; however, the responsibility for fair behaviour with customers, financial stability of an undertaking and prudent risk management rests primarily on the shareholders and management of the insurance undertaking.
In order to ensure effective supervision, the Bank of Lithuania follows the cooperation principle. It maintains a constant dialogue with insurance undertakings registered in the Republic of Lithuania and branches of insurance undertakings of other EU Member States, which is based on professionalism, openness, and respect. Where the insurance undertaking belongs to a group of undertakings, the Bank of Lithuania closely cooperates with the supervisory authority of the group.
Risk analysis is a stage of the supervisory review process. The following objectives are raised at this stage:
- to identify major risks faced by an insurance undertaking, analyse the risk assessment, management and control measures applied, evaluate whether an insurance undertaking holds sufficient capital to cover the risk and whether it will be able to maintain it in the next few years even in the case of adverse insurance or financial market developments;
- to assess the risks that are faced or could be faced by consumers due to unfair, negligent or illegal behaviour of an insurance undertaking;
- to allocate supervisory resources for the risk analysis of an insurance undertaking and its products in the proportional way, and to set adequate measures or take proper action that could minimise undesirable risks.
Risk analysis is carried out based on the regular reporting of insurance undertakings, the results of surveys, stress testing, information received during on-site inspections and meetings with management of undertakings, and other publicly available information.
In the process of risk analysis, the following five areas are analysed and assessed, based on internal methodologies establishing quantitative and qualitative evaluation criteria and ratios:
- business strategy;
- management system;
- own risk and solvency assessment carried out by the insurance undertaking;
- risk profile;
- behaviour with consumers.
Taking into account the assessment of these areas and of the insurance undertaking’s impact on the insurance market, the risk category of the insurance undertaking is determined based on a four-point scale.
Product groups are divided into four risk categories based on the financial product risk map, which is prepared in the course of analysis. When drawing it up, the risk to the customer posed by a product and the significance (distribution) of the product are taken into account. Risk to a customer is assessed based on the principles of fair behaviour with the consumer, which comprise the undertaking’s business culture, product development, observation and management processes, product distribution, and disclosure of fair information to customers.
On the basis of the results of risk analysis, an annual supervisory plan is prepared, and the intensity of the supervision of each insurance undertaking or its products is set. The plan includes on-site inspections and surveys of the insurance undertakings for the next year.
Ongoing supervision is conducted carrying out off-site inspection based on regular reporting, defined by legal acts, ad-hoc information to be submitted by insurance undertakings, as well as when providing positions or explanations to the provisions of legal acts, and analysing requests from insurance undertakings to issue approvals established in legal acts. Off-site inspection includes constant risk monitoring, review of the risk indicators on a quarterly basis; reconsideration of the supervisory actions taking into account risk developments and the adjustment of the supervisory plan where necessary.
On-site inspection of insurance undertakings is organised following Resolution No 03-43 of the Board of the Bank of Lithuania of 28 March 2014 on the guidelines for the inspection of members of the financial market participants supervised by the Bank of Lithuania.
Supervisory actions are selected in order to ensure timely identification of threats to the stability of an insurance undertaking, circumstances under which the rights and interests of customers could be infringed, and setting of eligible obligations or application of enforcement measures to remedy the situation.
Upon identification that insurance undertakings registered in the Republic of Lithuania and branches of insurance undertakings of other EU Member States do not comply with the requirements of legal acts, do not meet prudential requirements laid down therein, infringe the rights of customers, the Bank of Lithuania obligates them to remedy the deficiencies identified in their operations, and applies enforcement measures laid down in legal acts. In carrying out supervision, it is controlled whether insurance undertakings registered in the Republic of Lithuania and branches of insurance undertakings of other EU Member States eliminate breaches of legal acts and deficiencies in their operations in an adequate and timely manner.
Supervisory process review
Taking into consideration the experience, legal regulation developments, development of the insurance market, the efficiency of the supervisory process is assessed on a yearly basis and is improved or modified where necessary.
Aggregate statistical data
Aggregate statistical data is disclosed in accordance with Commission Implementing Regulation (EU) 2015/2451.
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