Level 1 Framework Directive
A high-level summary of the Solvency II Framework Directive
Solvency II’s Level 1 is the Solvency II Framework Directive, formally entitled the “Directive on the taking up and pursuit of the business of insurance and reinsurance”.
The Framework Directive was proposed by the European Commission and approved by the European Council and Parliament in 2009.
The Omnibus II Directive introduces amendments to certain areas of the Solvency II Framework Directive. It was formally adopted by the Council of the European Union on 16 April 2014 and published in the Official Journal on 22 May 2014.
The Solvency II Directive was agreed by European policymakers (the European Commission, Council of the EU and Parliament) in 2009 and published in the Official Journal on 17 December 2009.
An EU Directive lays down legal requirements that member states must put into their national laws by a specified deadline. All 28 EU member states are required to implement Solvency II, as well as the three additional states who are members of the European Economic Area (EEA). A Directive’s legal effect depends on it being implemented by member states.
The Solvency II Directive repeals 14 existing insurance and reinsurance Directives. Many of the provisions of those Directives are re-enacted in the Solvency II Directive, so will continue to be in force.
The following is a high-level summary of the contents of the Directive. It is not intended to be a complete listing or explanation of all the Directive’s contents, for which you should consult the Directive itself.
In this summary “insurer” is used in place of “insurance and reinsurance undertakings”.
DIRECTIVE 2009/138/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)
The title includes a reference number (made up of the year of adoption, a sequential number and the Treaty under which it was adopted) and the institutions that adopted the measure.
The Directive states the legal basis for its adoption and the procedures that were used.
The Solvency II Directive contains 142 Recitals, explaining the background to the legislation and its aims and objectives. The Recitals start with “Whereas” and each one is preceded by a number in brackets.
The Recitals are not part of the Directive itself, but can be used to interpret it. Member states do not have to implement the Recitals into their national legislation, but when drafting the necessary measures they can use the Recitals to obtain a better understanding of the Directive’s intentions.
- Chapter I Subject matter, scope and definitions (Articles 1 to 13)
- Chapter II Taking-up of business (Articles 14 to 26)
- Chapter III Supervisory authorities and general rules (Articles 27 to 39)
- Chapter IV Conditions governing business (Articles 40 to 72)
- Chapter V Pursuit of life and non-life activity (Articles 73 to 74)
- Chapter VI Rules relating to the valuation of assets and liabilities, technical provisions, own funds, solvency capital requirement, minimum capital requirement and investment rules (Articles 75 to 135)
- Chapter VII Insurance and reinsurance undertakings in difficulty or in an irregular situation (Articles 136 to 144)
- Chapter VIII Rights of establishment and freedom to provide services (Articles 145 to 161)
- Chapter IX Branches established within the Community and belonging to insurance or reinsurance undertakings with head offices situated outside the Community (Articles 162 to 175)
- Chapter X Subsidiaries of insurance and reinsurance undertakings governed by a third country and acquisitions of holdings by such undertakings (Articles 176 to 177)
More information on each chapter and its specifics can be downloaded here:
Chapter I Applicable law and conditions of direct insurance contracts (Articles 178 to 186)
This chapter contains a mixture of requirements, in five sections:
- Section 1 – Applicable Law. Member states are to apply Regulation (EC) No. 593/2008 (Rome 1) to determine the law applicable to direct insurance contracts (Article 178).
- Section 2 – Compulsory insurances. The conditions that apply when a member state imposes an obligation to take out insurance.
- Section 3 – General Good. A member state can only prevent a policyholder taking out a contract with an authorised insurer if it conflicts with “general good” requirements.
- Section 4 – Conditions of insurance contracts and scales of premiums. Member states cannot require prior approval or systematic notification of policy conditions or scales of premiums. This section essentially repeats Article 21.
- Section 5 – Information for policyholders. The information that insurers must provide to policyholders. For non-life insurance this is primarily pre-contractual information.
Chapter II Provisions specific to non-life insurance (Articles 187 to 207)
This chapter contains a variety of different provisions, inherited from earlier non-life insurance directives. The topics they cover include community co-insurance, legal expenses insurance, health insurance and insurance against accidents at work.
Chapter III Provisions specific to life insurance (Articles 208 to 209)
There are two Articles in this chapter: Article 208 prohibits member states from making it compulsory for life insurers to cede part of their underwriting activities and Article 209 requires premiums for new business to be sufficient.
Chapter IV Rules specific to reinsurance (Articles 210 to 211)
The two Articles in chapter IV cover finite reinsurance and special purpose vehicles.
Chapter I Group supervision: definitions, cases of application, scope and levels (Articles 212 to 217)
This is Title III’s introductory chapter. Article 212 contains definitions and the rest of the chapter sets out how group supervision should be applied and its scope.
Chapter II Financial position (Articles 218 to 246)
Chapter II has requirements relating to calculation and supervision of group solvency and risk management within a group.
Chapter III Measures to facilitate group supervision (Articles 247 to 259)
This chapter contains provisions on group supervisors and supervisory colleges.
Chapter IV Third Countries (Articles 260 to 264)
Chapter IV is concerned with circumstances in which a group has a parent undertaking outside the EU. Articles 260 – 262 concern assessment of equivalence of third country approaches to group supervision.
Chapter V Mixed-activity insurance holding companies (Articles 265 to 266)
The two Articles in this chapter contain provisions specific to groups where the parent undertaking is not an insurer.
Chapter I Scope and definitions (Articles 267 to 268)
Chapter II Reorganisation measures (Articles 269 to 272)
This chapter contains provisions on reorganisation measures – measures involving intervention by authorities to preserve or restore an insurer’s financial position, which affect pre-existing rights of parties other than the insurer.
Chapter III Winding-up proceedings (Articles 273 to 284)
Chapter III set out requirements for insurer winding-up proceedings.
Chapter IV Common provisions (Articles 285 to 296)
This chapter contains provisions that are not specific to one of the Title’s chapters, mainly of administrative nature.
Title V contains articles that do not easily fit into any other Titles.
Chapter I Transitional provisions (Articles 305 to 308)
Chapter II Final provisions (Articles 309 to 312)
Article 309 originally required member states to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive’s provisions by 31 October 2012. Amending legislation was introduced in 2012 to postpone transposition of Solvency II into national laws until 30 June 2013 and implementation of its requirements until 1 January 2014. These deadlines are now unlikely to be met. Legislative proposals to further defer Solvency II's application are expected in due course.
The Chapter also repeals existing insurance and reinsurance directives and says that the Directive enters into force 20 days after publication in the Official Journal.
Annex I Classes of non-life insurance
Annex II Classes of life insurance
Annex III Legal forms of undertakings
Under Article 17, member states must require insurers seeking authorisation to adopt one of the legal forms set out in Annex III. This Annex includes “the association of underwriters known as Lloyd’s”.
Annex IV Solvency Capital Requirement (SCR) Standard Formula
This Annex contains the basic formulae for calculating an insurer’s SCR.
Annex V Groups of non-life classes for the purposes of Article 159
Article 159 concerns insurers’ reporting of cross-border EEA business to their national supervisors. This Annex sets out the categories of non-life insurance that must be used when preparing the report.
Part A Repealed Directives with list of their successive amendments
Part B List of time limits for transposition into national law