The dangers associated with Solvency II’s imitation of Basel II
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Published:2019-12-28
Issue:1 and 2
Volume:1 and 2
Page:24-53
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ISSN:
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Container-title:Journal of Business Strategy Finance and Management
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language:en
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Short-container-title:Journal of Business Strategy, Finance and Management
Author:
Loguinova Kristina1ORCID, Byttebier Koen1
Affiliation:
1. Free University of Brussels/Vrije Universiteit , Brussel (VUB) Belgium .
Abstract
Ten years have passed after the last financial and economic crisis. As such, it is a good time to assess and to be reminded of the lessons that were learned and, more importantly, the lessons that were not learned, when it comes to the post-crisis reform of EU’s financial regulatory system. The current article aims at identifying the extent to which the Solvency II directive which codifies and harmonizes regulation regarding EU’s largest institutional investors, i.e. insurance undertakings, imitates its source of inspiration, Basel II, in order to introduce a critical way of thinking about the identified level of imitation. The main argument of this contribution is that since Solvency II is supposed to be revised this year, the EU legislator should embrace this opportunity to abstain from treating insurance undertakings as banks regulated under Basel II since Basel II did not prevent the financial and economic crisis of 2008 and arguably even added fuel to the fire. Moreover, the current article presents several other arguments as to why the regulatory model of Basel II is by no means a danger-free inspirational source for regulating insurance undertakings.
Publisher
Enviro Research Publishers
Reference216 articles.
1. In the current article, unless otherwise indicated, insurance undertaking is synonymous with “a direct life or non-life insurance undertaking which has received authorisation in accordance with [the Solvency II directive]”: Art. 13(1) Solvency II directive. And a direct life or non-life insurance undertaking which has an annual gross written income exceeding € 5 million: Art. 4(1), a Solvency II directive. As such it is understood to be company “principally engaged in financial intermediation as the consequence of the pooling of risks”: Annex A, point 2.60 Regulation of the Council nr. 2223/96/EC, 25 June 1996 on the European system of national and regional accounts in the Community, Pb.L. 30 November 1996, episode 310, 52 (hereinafter: ESA 95). A research of doctrine points at similar descriptions of insurance undertakings. For instance, according to BENJAMIN, insurance undertakings enter financial positions (take risks in exchange for rewards) by taking “insured risks in exchange for premium income”: J. BENJAMIN, Financial Law, Oxford, Oxford University Press, 2007, 14. Notice should be taken of the fact that at the end of the day an insurance undertaking is a (financial) company. 2. COM(15)3120 [Commission document nr, 3120 of 2015], 3; D. FOCARELLI, “Why Insurance Regulation is Crucial for Long-Term Investment and the Economic Growth” in P. MARANO and M. SIRI (eds.), Insurance Regulation in the European Union: Solvency II and Beyond, Cham, Palgrave Macmillan, 2017, 341. In 2014, insurance undertakings managed 10 trillion euo in terms of financial assets: D. FOCARELLI, “Why Insurance Regulation is Crucial for Long-Term Investment and the Economic Growth” in P. MARANO and M. SIRI (eds.), Insurance Regulation in the European Union: Solvency II and Beyond, Cham, Palgrave Macmillan, 2017, 341.Directive of the European Parliament and of the Council nr. 2009/138/EC, 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), Pb.L. 17 December 2009, episode 335, 1 (hereinafter: Solvency II directive). The Solvency II project that resulted into Solvency II directive was one of the main outstanding items from the Financial Services Action Plan (1999-2005): COM(07)361 final [Commission document n° 361 of 2007, final version], 2. This Solvency II directive is the first level of the new EU control system for the insurance business in general (the Solvency II system) which comprises 4 (,5) levels in total, correspondingly to the Lamfalussy process for the composition of EU financial legislation. 3. The scope of the current article is limited to this first level and more narrowly to the rules applying to insurance undertakings; rules esp. developed for reinsurance undertaking are here not considered. However, when necessary to make a point under the scope of the current article, reference will also be made to some of the rules of Solvency II system’s level 2: Delegated Regulation of the Commission nr. 2015/35/EU, 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), Pb.L. 17 January 2015, episode 12, 1 (hereinafter: Solvency II delegated regulation). 4. In the current article, unless otherwise indicated, the latest version, the Basel II version of 2006, has mainly been consulted for making this comparison: Basel Committee on Banking Supervision, Basel II, International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Version, Basel, Bank for International Settlements, 2006, i-333 (hereinafter: Basel II). Because Basel II does not contain “articles” or “sections” as a legislative document usually does, the current article cites Basel II’s page numbers when making a reference to certain passages from its content. Throughout the article, reference is also made to Basel II’s predecessor and successor “Basel I” and “Basel III”. Although these are not officially referred to as Basel I and Basel III these references will nevertheless be employed in the current article, unless otherwise indicated, for reasons of convenience.For those interested in an explanation on the different kinds of spelling aptly encountered, it is recommendable to consult the following monograph: G.A.WALKER, International Banking Regulation: Law, Policy and Practice, The Hague, Kluwer Law International, 2001, 41. 5. K. VAN HULLE, “Invloed van de financiële crisis op de nieuwe solvabiliteitsregeling van de (her)verzekeringsondernemingen” in C. VAN SCHOUBROECK, W. DEVROE, K. GEENS and J. STUYCK (eds.), Over Grenzen: Liber amicorum Herman Cousy, Antwerpen, Intersentia, 2011, 912; K. VAN HULLE, “Solvency II: een nieuwe solvabiliteitsregeling voor de verzekeringssector” in INSTITUUT FINANCIEEL RECHT (ed.), Van alle markten. Liber Amicorum Eddy Wymeersch, Antwerpen, Intersentia, 2008, 1028; H. COUSY, “An Outsider’s View on Solvency II”, REDC 2010, 109; G. O’DONOVAN, Solvency II Stakeholder Communications and Change, Surrey, Gower, 2011, 11-13; R. DOFF, “Risk Management Implementation in the Insurance Industry” in M. CRUZ (ed.), The Solvency II Handbook: Developing ERM Frameworks in Insurance and Reinsurance Companies, London, Risk Books, 2009, 6; M. CRUZ, “Introduction: A Journey to Solvency II” in M. CRUZ (ed.), The Solvency II Handbook: Developing ERM Frameworks in Insurance and Reinsurance Companies, London, Risk Books, 2009, xxxi; F. DE WEERT, Bank and Insurance Capital Management, Chichester, Wiley, 2012, 95; P. ZWEIFEL and R. EISEN, Insurance Economics, Heidelberg, Springer, 2012, 343; E. DENTERS, “Global Financial Architecture and the Insurance Sector” in P.M. LIEDTKE and J. MONKIEWICZ, The Future of Insurance Regulation and Supervision, Basingstoke, Palgrave Macmillan, 2011, 44; H. COUSY, and M. DREESEN, “De bredere effecten van Solvency II in België”, Bull.ass. 2009, 148; H. COUSY, “An Outsider’s View on Solvency II”, REDC 2010, 109-110; K. VAN HULLE, “Solvency II: Het einde van het begin”, T. Verz. 2009, 33-34; N. GATZERT and H. WESKER, “A Comparative Assessment of Basel II/III and Solvency II”, Geneva Pap R I-ISS P 2012, 540.The policy suggestion to use Basel II as an inspirational source for the Solvency II directive originated from an outsourced investigation study conducted by KPMG: KPMG, Study into the methodologies to assess the overall position of an insurance undertaking from the perspective of prudential supervision, 2002, 242.
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