Harmonization of Insurance Supervisory Law

Johannes Gutenberg University, Mainz, Germany



This chapter addresses the fundamental issue of what degree of harmonization applies in the Solvency II system. Distinguishing among the several degrees of harmonization—minimum harmonization, maximum harmonization, and full harmonization—leads to the conclusion that the Solvency II Directive has full harmonization as its objective. This has two important ramifications: First, the Solvency II Directive requires that any insurance supervisory regime implementation by the respective national legislators must completely align with the European insurance supervisory regime. Second, a system of full harmonization prohibits national legislators from unilaterally enacting additional measures not provided for in European law. A pertinent example in the German insurance supervisory regime is the previously extant general supervision according to the principle of abusiveness, where now the Solvency II system allows only supervision of legality.

First published as “Die Vollharmonisierung der Versicherungsaufsicht durch Solvency II” [in English: Full Harmonization of Insurance Supervision under Solvency II], VersR (2011), 825 ff. with Martin Lange as coauthor. Martin Lange was at that time a research assistant at the law school of Johannes Gutenberg University in Mainz.

1.1 Introduction

The adoption of the Solvency II Framework Directive,1 the impending passage of the implementing regulations, and the implementation of these European law provisions in the national supervisory systems of EU Member States together constitute decided progress toward fully establishing the internal insurance markets of the European Union. Decades have gone into integrating the internal insurance market; and these efforts have reached their highest point yet, placing the insurance supervisory regime on radically changed footing. Solvency II will consolidate and expand the previously existing EU directives in the area of insurance2 and align that policy more clearly with the goal of creating a regulatory framework for primary insurance and reinsurance that achieves the greatest possible uniformity throughout Europe. Consequently, the Solvency II Framework Directive demands the creation of uniform conditions in the conduct of the insurance business throughout the internal market. This uniformity is to be achieved by eliminating the most extreme differences among the supervisory systems of EU Member States. In setting this demand, the Directive enunciates the fundamental legislative objective of Solvency II for Europe.3

Against the background of this goal, however, there still remain to be settled the issues of the degree of the intended pan-European harmonization of the insurance supervisory regime and of the practical implications flowing from changes to the existing supervisory system.4 This article addresses these issues. At the outset, this article looks at the classification of harmonization methods under European law (1.2, below). Next, the European provisions of Solvency II legislation are examined with regard to the intensity of the intended harmonization within the insurance supervisory regime (1.3, below). Finally, this article discusses basic issues of European law in consideration of the preexisting design of insurance supervision in Germany, draws conclusions about how the supervisory system will be configured in the wake of Solvency II, and illustrates outcomes using particular real-world areas of supervision (1.4, below).

1.2 The Typology of Harmonization Methods

The methods of legal harmonization across Europe via secondary law directives can be divided into three variants, identified under the criterion of how much discretionary power is left to the national legislator in the field of implementation. The three variants are generally distinguished as minimum harmonization, maximum harmonization, and full harmonization.

In the case of minimum harmonization, the Directive by law sets a minimum level of regulatory intensity, which the national legislator must at least meet but is allowed to exceed. Thus, the minimum harmonization scheme allows a higher degree of regulatory intensity and stricter legal requirements than designated in the Directive. On the other hand, implementation as national law must at least meet the minimum level of harmonization. Accordingly, an implementation that exceeds the stated minimum level under European law does not violate the secondary law provisions of the given directive, even if the implementation should contribute to a fragmentation of the law. A supererogatory implementation, however, must be evaluated against the criterion of possible restrictions on fundamental European economic freedoms in cross-border commerce and the concomitant distortions of competition.5 In addition, the provisions of national constitutional law, particularly those provisions relating to basic rights of the persons affected, can set limits on reverse discrimination implicit in stricter treatment of nationals. Over the course of a long period, minimum harmonization by means of directives has been the established method in the European legal harmonization process.6

In contrast to minimum harmonization, the standard of maximum harmonization sets the specified harmonization level according to European law at the upper rather than at the lower limit. Consequently, where a directive prescribes a system aimed at maximum harmonization, implementation by the national legislator is not allowed to exceed the degree of harmonization set under European law. The legislator may, however, prescribe a lower standard. Maximum harmonization is rare and primarily occurs when required to prevent distortions of competition in a certain area, where the distortions result from overly broad national regulatory provisions, in the nature, perhaps, of national legislation seeking to outbid with respect to a given level of legal protection and regulation.7

We come then to full harmonization, which combines the devices of both minimal and maximum harmonization8 and, by virtue of the legal rules contained in the Directive, represents the broadest form of harmonization. Full harmonization has as its object complete legal harmonization. Thus, in implementing a Directive, the national legislator cannot deviate from the Directive, whether up or down, when the Directive is aimed at full harmonization. This is so because full harmonization by legal rules contained in a Directive has as its end absolute sectoral harmonization of national rights among the Member States.9 The difference between a directive aimed at full harmonization and a regulation—besides being acts of law in different form—is simply that the regulation requires no implementing legislation at the Member State level but is immediately effective. In their legal effect, the methods are interchangeable, distinguished only on the basis of their designations.10 By different paths, both methods lead to the same result: complete unification of the given areas of law throughout the European Union. Directives intended to bring about full harmonization in given areas thus limit disparate regulatory intensity and by the same token limit distortions of competition among EU Member States. Accordingly, by guaranteeing a level playing field in the legal environment throughout Europe, directives represent the most effective tool for market integration. Directives are thus the most appropriate device—with respect to their given subject-matter—for achieving the completion of the internal markets. It is primarily this characteristic that is occasioning increased application of the Directive as a tool aimed at full harmonization.11

1.3 The European Law Sources for Harmonization of the Insurance Supervisory Regime

1.3.1 The Solvency II Framework Directive The Legislative Process

The overriding determinants in establishing the intensity of the desired pan-European harmonization of the supervisory system are the Framework Directive provisions themselves. Indeed, the entire Solvency II legislation makes use of the legislative process12 such that the Framework Directive is but the first of altogether four regulatory levels. Further steps will see implementing regulations (Level 2 and Level 3) adopted based on the Framework Directive and greater harmonization undertaken. The Level 2 implementing regulations as well as further measures in the regulation levels will be adopted by the European Commission, which is empowered with their implementation, but without the participation of the primary lawmaking bodies of the EU. Pursuant to the reservation of materiality, initially developed by the European Court of Justice13 and codified in art. 290, para. 1, AEUV [Treaty on the functioning of the European Union] since the effective date of the Treaty of Lisbon, fundamental provisions must be already addressed in the Framework Directive. But an express and generally applicable provision for the harmonization level sought is not to be found in the Solvency II Framework Directive legislative text. Thus, to determine what measure of harmonization is intended by the Framework Directive one must look primarily to the provisions of the Directive—not those generally directed to the degree of harmonization—and to their telos and classification. The Recitals

First resort for enlightenment as to the harmonization level sought may be the Solvency II Framework Directive Recitals. Recital 2 of the Directive sets forth as the basic objective: “In order to facilitate the taking-up and pursuit of the activities of insurance and reinsurance, it is necessary to eliminate the most serious differences between the laws of the Member States as regards the rules to which insurance and reinsurance undertakings are subject.”14 At the same time, the Recital refers to the provision of a “legal framework for insurance and reinsurance undertakings to conduct insurance business throughout the internal market.” Upon first reading, the terminology of Recital 2—especially the use of “most serious differences” and “legal framework”—seems to belie the objective of full legal harmonization and merely to indicate an amelioration of cross-border business activities and removal of serious differences among supervisory systems. The word “eliminate” in reference to “differences between the … laws of the Member States” does, however, demonstrate that the Solvency II Directive, even in its first substantive Recital, is asserting the objective of an essentially unitary system of supervisory systems of EU Member States. In like manner, Recital 11, which also refers to the Directive as “an essential instrument for the achievement of the internal market,” expresses the objective “to bring about such harmonization as is required” to realize a consistent country of origin supervision of insurance undertakings.

Relating to certain regulatory sectors, there are further indications for a harmonization as comprehensive and extensive as possible. For example, Recital 16 provides for enhanced harmonization of regulation for evaluation of claims and liabilities with reference to risk management. Also, Recitals 46 and 54 state that insofar as possible valuation standards for supervisory purposes should be compatible with international provisions. Similarly, Recital 75 regards “community-wide harmonization to the extent possible” as “critical” for supervisory assessment of a proposed purchase of shares.

Recital 40 of the Solvency II Framework Directive sets forth a clear indication for the objective of unifying supervisory systems of EU Member States in expressly stating that “supervisory convergence” is an objective of the Directive. Pursuant to the wording of the Recital, convergence is to apply not only to the supervisory rules and tools, but also in like manner to the diverse “supervisory practices” among the Member States. The Committee of European Insurance and Occupational Pensions Supervisors,15 created in 2009 and since replaced by the European Insurance and Occupational Pensions Authority (EIOPA),16 is to make key contributions in this area to harmonization and convergence of, above all, the diverse supervisory practices in the Member States. And further, Recitals 113, 114, and 115 provide for the creation of an additional College of Supervisors in the area of group supervision.

Both the supervisory authorities in the Member States where undertakings belonging to a group are located and also the EIOPA are to be represented in the College of Supervisors to ensure an adequate exchange of information in order to secure effective group supervision.

Convergence of this nature in supervisory rules and tools and in the diverse supervisory practices of the Member States of the EU is not possible without an extensive pan-European, legally harmonized insurance supervisory regime. In the Recitals, the Directive sets out as its objective the convergence of the supervisory systems all the way to the actual supervisory practices, whereby prerequisites of this objective are unified legal principles, harmonized bases for intervention, and congruent legal design of the supervisory tools. The objective of supervisory convergence, however, conflicts in principle at the level of the Directive with the changeover from a rule-based to a principles-based approach to supervision, this latter approach being the one pursued by the Directive.17 If in following the principles-based approach, one grants to supervisory authorities under application of undefined legal terms18 a broadened discretionary power for flexible, individually tailored evaluations of supervisory circumstances, this will tend to lead to fragmentation and increasing unpredictability in supervisory practices for undertakings subject to these rules. This result would precisely run counter to the objective of supervisory convergence. Rather, this objective can be attained only by application of a principles-based regulatory structure such as the Solvency II Framework Directive if in turn at the level of the implementing regulations rule-based law is created, such as will lead to uniformity of legal principles and consequently to convergence of supervisory practice.

Indeed, the Recitals to the Solvency II Directive introduce the relationship of rule to exception for complete harmonization and the powers of deviation and self-regulation belonging to the Member States. This relationship is treated in fuller detail in the legislative part of the Directive. Numerous Recitals have as their objective the most complete harmonization possible. Among these are Recitals 2, 11, 75, 87, and 93. Besides these, a total of eleven Recitals—numbers 6, 9, 53, 75, 81, 83, 85, 86, 96, 99, and 127—cede to the Member States a choice among several supervisory schemes or the determination of the regulatory intensity. The Legislative Text

While no general full harmonization of the supervisory system is expressly mandated in the legislative text or in the Recitals of the Directive, one finds the idea of supervisory convergence via legal harmonization set forth in different places among the rules of the Solvency II Framework Directive. Above all, this idea of supervisory convergence via legal harmonization is present in legal bases that grant the Commission the right to adopt more extensive implementing regulations at the second regulatory level (Level 2). Examples are art. 35, para. 4 of the Directive on reporting by supervisory authorities and art. 50, para. 2 of the Directive on establishing a governance system specifically pertaining to risk and stability assessment. These contain the directive to ensure extensive convergence within the designated areas by the adoption of implementing regulations.19 In addition, in order to ensure the reorganization and financing of insurance undertakings, art. 143 of the Directive allows for enabling powers for implementing regulations with the objective of guaranteeing supervisory convergence. Further still, art. 71 in chapter 5 of the Directive includes a stand-alone provision placing the Member States under an explicit duty to hold their supervisory authorities in line with the convergence principle.

This duty further extends to close cooperation with European institutions, especially with the EIOPA, which has the additional authority to issue non-binding guidelines and recommendations.

The objective of full harmonization in the supervisory scheme is also seen in that the Solvency II Framework Directive expressly grants to the Member States and further down the line to the national supervisory authorities scope for deviation in but a few areas. These areas are group supervision under art. 213 ff., Recital 99, and duration under art. 304.20 Accordingly, in negotiations over the Solvency II Framework Directive, it was not possible to achieve uniform mandatory group supervision by the supervisory authority of the Member State in which the parent company is headquartered. Consequently it is difficult under supervision law to shape pan-European group support for subsidiaries when own funds are concentrated at the top management level.21 In principle, under art. 213, para. 1, subchapter 2, the rules relating to supervision of independent insurance undertakings also will be applied to insurance undertakings that belong to a group, to the extent that Title III of the Directive on group supervision does not expressly provide otherwise. Furthermore, in a range of situations, the Member States and the supervisory authorities are empowered objectively to determine on their own the areas where group supervision will be applied.22 The supervision of insurance undertakings that belong to groups based on the criteria applied to independent insurance undertakings, resides as before and by virtue of express decision with the individual national supervisory authorities, despite its harmonization under the Directive.

There are a total of 46 rules touching Member State options in the Directive. The fact that deviations from the provisions of the Directive in the nature of a relationship of rule to exception have been allowed in individual expressly designated areas, whereas the Directive overall seeks to craft uniform regulation, shows that in the remaining areas the Directive assumes complete legal harmonization, and thus full harmonization of the supervisory system. So explicit a grant to the national legislator of power to deviate in implementing the Directive, a power restricted to certain regulatory sectors, in itself allows the contrary inference for the objective of full harmonization in all areas comprised by the Directive and requiring implementation under art. 310, para. 1, sent. 1 of the Directive. Through the use of the phrase “at least” in a significant number of its provisions, the Directive indicates that a great number of discretionary legislative areas are granted to the Member States within the prescribed harmonization approach, and this without expressly denoting the Member States as subjects of the rules.23 This is further supported by the closed system of rule and exception because these differentiations and distinctions would be superfluous in a system of minimum harmonization.

1.3.2 The Implementing Regulations for the Solvency II Framework Directive

The adoption of implementing regulations for Solvency II is imminent. Up to this point there have been only internal drafts of the implementing regulations for the second regulatory level (Level 2) as well as official preparatory announcements and documents emerging from ongoing consultation proceedings.24 It is conceivable that as binding acts the second level implementing regulations will entail a departure from principles-based rules and fill the undefined legal terms of the Solvency II Framework Directive with rules-based content. To this extent, one can no longer on the whole speak of legislation in the Solvency II area as a principles-based approach. This is so because a solid conceptual understanding of principles-based law presupposes an equivocal departure, both de jure and de facto and likewise consistent, from rules-based standards on all regulatory levels.25 Only by attention to form and separately examining the regulatory principles of the individual levels can one arrive at the supposition of a partially principles-based regulatory approach at the highest regulatory level in the Solvency II Framework Directive.26

The preparatory documents and working papers for the impending adoption of the implementing regulations already suggest a regulatory intensity and a high degree of detail, leading to the conclusion that the anticipated standards will be rules-based.27 By the same token, a rules-based design of the implementing regulations points to the objective of complete harmonization of supervisory provisions and anticipates convergence of supervisory practice, since uniform regulatory provisions throughout the EU will be achieved by employing a consistent rules-based approach. Precisely on account of the anticipated legal nature of the implementing regulations at the second level as directly and equally applicable regulations in all Member States, a design of that nature will lead to a level playing field for regulatory standards and will significantly reduce the discretionary scope of the national supervisory authorities in applying the law below the level of discretion that these authorities would have under a consistently applied principles-based approach. To the extent that the implementing regulations are enacted as regulations as anticipated, the European legislator will prefer the objectives of complete harmonization of the regulatory provisions and extensive convergence of supervisory practice to principles-based design of the implementing regulations, such as might tend to lead to fragmentation of the law and its application.

According to a ruling of the ECJ, the fact that the implementing regulations—as might be expected—will exceed the provisions of the basic legal act of Level 1 as to their regulatory intensity and with respect to degree of legal harmonization sought does not contravene the reservation of materiality and the fundamentally principles-based approach of the Solvency II Framework Directive. Thus, the ECJ early on ruled that the implementing regulations are permitted to exceed a purely technical implementation of the basic legal act and to allow for a higher degree of detailed and novel rules.28

1.3.3 The EIOPA Regulation

The regulation establishing a European insurance supervisory authority will strengthen the effort toward extensive harmonization that already exists in substantive law sources.29 The stated objective of the regulation in establishing the EIOPA is “to contribute … ensuring a high, effective and consistent level of regulation and supervision” in order to establish a European system of financial supervision and thereby to improve the functioning of the internal market.30 It is further the task of the EIOPA in applying European law31 to prevent regulatory arbitrage within the EU, which could occur as a result of disparate supervisory levels within the individual Member States. In so doing, the EIOPA by promoting “supervisory convergence” would be ensuring a level playing field for all supervised insurance undertakings.32 The idea of a level playing field is made explicit in relation to the alignment of the technical regulatory standards.33 In essence, “greater harmonisation and the coherent application of rules for financial institutions and markets across the Union should also be achieved.”34 Accordingly, the objective is a coherent and effective application of basic principles of European law and thus the creation of a “common Union supervisory culture.”35

The special emphasis on the need for extensive harmonization of the supervisory systems of EU Member States is above all attributable to the fact that the establishment of the uniform European supervisory authority, EIOPA, came about in the course of overcoming the recent financial crisis. This crisis, in the view of the European legislator, exposed “shortcomings in the areas of cooperation, coordination, consistent application of Union law and trust between national supervisors.”36 As a consequence, to ensure “correct and consistent application of Union law,” EIOPA was equipped in particular with the power to adopt enforcement measures in the form of decisions with respect to individual supervised insurance undertakings, to the extent a national supervisory authority has not complied with a previous—equally binding—settlement decision of EIOPA.37

In establishing the EIOPA, the European legislator’s top priorities were thereby to ensure a uniform supervisory level in the EU, to guarantee uniform application of the substantive provisions, to create a level competitive playing field, and thus to bring about complete harmonization of the EU supervisory systems. If this concept of full harmonization of the supervisory systems had not already been inherent in the basic substantive legal provisions, most especially in the Solvency II Framework Directive, it would not have been legally possible to create such an objective in the establishment of the EIOPA. To this extent, the fact that the objective of the EIOPA is the complete alignment of supervisory systems leads to inferences about the intended and achieved codification of the full harmonization principle in the Solvency II Framework Directive. Thus, the EIOPA is designed only to consistently carry out the substantive provisions of the Solvency II Framework Directive, provisions that must be understood as overwhelmingly directed at full harmonization.

1.3.4 Interim Result

Solvency II legislation has as its goal the full harmonization of supervisory systems in the EU Member States. On the basis of the reservation of materiality under art. 290, para. 1, of the AEUV, the primary reference for the objective of harmonization is the Solvency II Framework Directive. The teleological and systematic interpretation of the Recitals and the legislative text of the Solvency II Framework Directive lead one to the conclusion that the intended result is a complete alignment of the insurance supervisory provisions and a maximally extensive convergence of supervisory practices in the EU Member States. At the least, the specific exceptions in the Directive, namely group supervision and duration approach, where scope has been left to the Member States in implementation, compel by implication the inference of a harmonization design in all other areas.

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