Ideology of the Substance: Solvency II Versus Solvency I and Basel II

Loguinova, Kristina

doi:10.1007/978-3-030-26357-7_10

Kristina Loguinova⁴

Part of the book series: Economic and Financial Law & Policy – Shifting Insights & Values ((EFLP,volume 4))

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Abstract

The fourth chapter of the second part of this monograph methodologically trashes the ideology of the substance of Solvency II whilst comparing it to Solvency I and Basel II. First, the objectives of all three instruments are compared as methodological trashing involves an investigation into potential contradictions between what an instrument sets out to do and what an instrument actually does.

One of the mains point of critique of this chapter are the problems associated with VaR (which could potentially be solved by econophysics) and the freedom of investment as propagated by Solvency II which turns out to be not so free in practice (which could potentially be solved by lower capital requirements for sustainable assets).

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Notes

1.
Grazia Starita and Malafronte (2014), p. 16.
2.
SEC(07)871 [Internal document of the Secretariat-General nr. 871 of 2007], 14; SWD(14)308 final [Staff Working Document nr. 308 of 2014, final version], 6–7.
3.
Wandt and Sehrbrock (2011), pp. 923–934.
4.
Wandt and Sehrbrock (2011), p. 923 (personally added underlineation).
5.
SEC(07)871 [Internal document of the Secretariat-General nr. 871 of 2007], 14. The General objectives of the Solvency II system include the deepening of the integration of the EU insurance markets; the enhancement of the protection of the policyholders and beneficiaries; the improvement of the international competitiveness of the EU insurers (and reinsurers); and the promotion of better regulation. The specific objectives include the improvement of the risk management of the EU insurers (and reinsurers); the advancement of supervisory convergence and cooperation; the encouragement of cross-sectoral consistency; the provision of a better allocation of capital resources, the promotion of international convergence; and the increase of transparency. The operational objectives include the codification and recasting of the Solvency I; the harmonization of the calculation of technical provisions; the introduction risk-sensitive harmonized solvency standards; the introduction of proportionate requirements for small undertakings; the harmonization of supervisory powers, methods and tools; the harmonization of supervisory reporting; the promotion of compatibility of prudential supervision of insurance and banking; the promotion of compatibility of valuation and reporting rules with the international accounting standards elaborated by the International Accounting Standards Boards; the promotion of compatibility of the prudential regime for EU insurers with the work of the International Association of Insurance Supervisors (IAIS) and the International Actuarial Association (IAA); to ascertain efficient supervision of insurance groups and financial conglomerates.
6.
Financial Services Authority (2007), “Definition of Capital”, FSA Discussion Paper 2007, 14–15. For an interesting take on the paradoxical relationship between the right to access financial services for consumers and the need for consumer protection in the light of unlimited and unrestricted access to financial services, see: Micklitz (2010), pp. 7–26.
7.
Basel II, 2.
8.
Basel II, 2.
9.
Basel II, 7. Gatzert and Wesker have pointed out that apart from these main objectives of the Basel II instruments its pillar 2 and pillar three have objectives of their own: Gatzert and Weskers (2012), pp. 556–562. Pillar 2 intends “to ensure that banks have adequate capital to support all the risks in their business, [and] also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks.”: Basel II, 204. Pillar 3 on the other hand aims to compliment pillar 1 and pillar 2 with market discipline: Basel II, 226.
10.
Gatzert and Weskers (2012), p. 544.
11.
Consideration 16 Solvency II.
12.
Consideration 16 Solvency II directive.
13.
Wandt and Sehrbrock (2011), pp. 924–926.
14.
Consideration 2 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 1; Consideration 2 Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 3. Also, see: Considerations 1 and 3 Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 17.
15.
Wandt and Sehrbrock (2011), p. 926.
16.
That is not to say that Solvency II has forgotten about the insurance market. Rather, its 11th consideration states that it regards itself as “an essential instrument for the achievement of the internal market”: Consideration 11 Solvency II. This is certainly in accordance with the demands of European businessmen: Coutu et al. (1993), p. 68.
17.
Art. 27 Solvency II directive. Yet, when looking at the Solvency II system overall, the primary main objective as identified by the European Commission is the increase of the integration of the EU insurance market in line with articles 47(2) and 55 of the Treaty of Nice. Consumer protection for policyholders and beneficiaries is seen as a part of this primary main objective in line with the 1986 decision of the CJEC (see Sect. 8.1): SEC(07)871 [Internal document of the Secretariat-General nr. 871 of 2007], 14. This might seem as a contradiction as an integrated EU insurance market leads to more consumer choice rather that consumer protection. Some authors like Fitchew do not see consumer choice and consumer protection as contradictory alternatives. Fitchew believes that it is perfectly possible for consumer choice and consumer protection to coexist and even for consumer choice and protection to reinforce each other: Fitchew (1992), p. 79.
18.
Van Hulle (2009), p. 42; Wandt and Sehrbrock (2011), p. 925; Van Hulle (2011), pp. 914–915.
19.
Art. 28, paragraph 1 Solvency II.
20.
As such, the demand for fairness was a particular demand from European businessmen when it came to EU legislation: Coutu et al. (1993), p. 64. This only makes it more important to know the answer to the question for who the markets should be fair.
21.
Art. 28, paragraph 1 Solvency II.
22.
Regulation of the European Parliament and of the Council nr. 1092/2010, 24 November 2013 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board, Pb.L. 15 December 2010, episode 331, 1 (hereinafter: ESRB regulation). The mentioned definition of financial markets can be found in article 2(b) of ESRB regulation.
23.
Wandt and Sehrbrock (2011), p. 925.
24.
Wandt and Sehrbrock (2011), p. 925.
25.
Art. 28, paragraph 2 Solvency II.
26.
Wandt and Sehrbrock (2011), p. 925 (personally added underlineation).
27.
Wandt and Sehrbrock (2011), pp. 925–926.
28.
Recital 61 Solvency II directive.
29.
Van Hulle (2011), p. 915.
30.
Sandström (2011), p. 451.
31.
Art 143, section 2 Solvency II directive (personally added underlineation).
32.
Sandström (2011), p. 588.
33.
Van Hulle (2011), p. 912. He has also identified other objectives of the Solvency II that are complimentary to the ones overtly mentioned in its articles. When reading between the lines, Solvency II is actually very similar to Basel II as it aims to create a solvability regime that accounts for all the risks encountered by an insurance undertaking, to widen the EU internal market by implementing uniform solvability rules and to increase competition between insurance undertakings by connecting capital requirements to virtuous risk management practices. The last implicit aim of the Solvency II, i.e. competition, has been a long-standing area of attention in the insurance sector. In immature insurance markets competition is controlled for the sake of creating a reasonable level of stability and/or for the sake of avoiding monopolies. In mature insurance markets where there are a lot of suppliers and low entry and exit barriers it is trickier to justify legal rules aiming to increase competition. Public mistrust of insurance undertakings and political pressure are usually the reasons for such legislative objectives: Klein (2013), pp. 910–915.
34.
Art. 27 Solvency II. This argument has also been acknowledged by the ECB. The ECB has namely stated that “the primary aim of Solvency II is to strengthen the protection of policyholders, while Basel II is more focused on the solvency positions of large international banks”: ECB, Potential Impact of Solvency II on Financial Stability, Frankfurt am Main, ECB, 2007, 34. Even though solvency positions of banks are supposed to benefit consumers as well due to the free market mechanism, it can be deduced from the ECB’s tone that Basel II is primarily concerned with the smooth function of banks for the sake of banks themselves, rather than their consumers.
35.
In this monograph, unless otherwise indicated, long-term investment is synonymous with “the formation of long-lived capital, covering tangible assets (such as energy, transport and communication infrastructures, industrial and service facilities, housing and climate change and eco-innovation technologies) and intangible assets (such as education and research and development) that boost innovation and competitiveness”: COM(13)150 final [Commission document nr. 150 of 2013, final version], 2. Such a conceptualization essentially comes down to any investment into productive activities supporting sustainable economic growth and development to qualify as long-term investment.
36.
SWD(14)308 final [Staff Working Document nr. 308 of 2014, final version], 6–7.
37.
European Commission (1985), p. 26.
38.
European Commission (1985), pp. 26 and 42. However, mentioning something is not the same as setting out a programme.
39.
COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 5.
40.
COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 25.
41.
COM(13)150 final [Commission document nr. 150 of 2013, final version], 9; COM(14)168 final [Commission document nr. 168 of 2014, final version], 5–6. The idea of using financial actors for long-term investment needs of certain industrial sectors and the economy overall already existed in 1983: COM(83)207 final [Commission document nr. 207 of 1983, final version], 8–9.
42.
U.S. Government Accountability Office (GAO) (1993), p. 35.
43.
Story and Walter (1997), p. 263.
44.
Annex A point 2.35 ESA 1995, 45.
45.
Annex A point 2.35 ESA 1995, 45.
46.
Consideration 35 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4; Consideration 53 Solvency II.
47.
Art. 20(1), first paragraph Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19; Art. 17(1), first paragraph Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 11; Art 76(1) Solvency II.
48.
Art. 20(1), first paragraph Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19; Art. 17(1), first paragraph Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 11.
49.
Art. 76(1) Solvency II.
50.
Consideration 35 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4; Consideration 53 Solvency II.
51.
Consideration 35 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4.
52.
Consideration 12 Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 2.
53.
Consideration 53 Solvency II.
54.
Art. 20(2) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19. This rule, more or less, also exists in Solvency II’s third pillar rules on public disclosure. Namely, the actual bases and the methods used by insurance undertakings in the valuation (and calculation) of their technical provisions: Art. 51(1), second paragraph, d Solvency II.
55.
Art. 20(1), second paragraph Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
56.
Art. 20(1), second paragraph, A(i) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
57.
Art. 20(1), second paragraph, A(i) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
58.
Art. 20(1), second paragraph, A(ii) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
59.
Art. 20(1), second paragraph, A(iii) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
60.
Art. 20(1), second paragraph, A(iv) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
61.
Art. 20(1), second paragraph, A(v) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19.
62.
Art. 20(1), second paragraph, A(vi) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
63.
Consideration 36 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4.
64.
Art. 20(1), second paragraph, B Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
65.
Art. 20(1), second paragraph, B(a) (i) and (ii) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
66.
Art. 20(1), second paragraph, B(b) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
67.
Art. 20(1), second paragraph, C Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
68.
Art. 20(1), second paragraph, F Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 20.
69.
Art. 17(1), second paragraph Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 11.
70.
Consideration 6 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 1. As such, Direcitve 2002/83/EC repeats Directive 91/675/EEC in part. For instance, the (fifth) principle of separate calculation in regards to the establishment of the amount of technical provisions can also be found in Directive 91/674/EEC: Art. 20(1), second paragraph, A(v) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 19; Art. 59(1) Directive of the Council nr. 91/674/EEC, 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, Pb.L. 31 December 1991, episode 347, 24.
71.
Art. 56 Directive of the Council nr. 91/674/EEC, 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, Pb.L. 31 December 1991, episode 347, 20.
72.
U.S. Government Accountability Office (GAO) (1993), p. 38.
73.
Art. 25 Directive of the Council nr. 91/674/EEC, 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, Pb.L. 31 December 1991, episode 347, 15.
74.
Art. 57(1) Directive of the Council nr. 91/674/EEC, 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, Pb.L. 31 December 1991, episode 347, 24.
75.
Art. 57(1) Directive of the Council nr. 91/674/EEC, 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, Pb.L. 31 December 1991, episode 347, 24.
76.
Consideration 54 Solvency II.
77.
Art 76(2) Solvency II. Also, see: Consideration 55 Solvency II.
78.
Consideration 57 Solvency II.
79.
Art. 76(3) Solvency II.
80.
Art. 77 Solvency II.
81.
Art. 77(4) Solvency II. Solvency II also contains rules on other elements that should be taken into account in the calculation of technical provisions. One of these elements is inflation: Art. 78(2) Solvency II.
82.
Art. 77(2), first paragraph Solvency II. The remaining paragraphs of Solvency II’s article 77(2) provide further rules on the calculation of the best estimate which fall beyond the scope of this research.
83.
Art. 77(3) Solvency II.
84.
Cousy and Dreesen (1997), p. 156.
85.
Cousy and Dreesen have also noted that when it comes to investment, Solvency II has headed towards the highroad of deregulation: Cousy and Dreesen (1997), p. 156. Deregulation is an ambigious concept due to its many meanings within the legal context specifically and in other academic disciplines. For instance, according Cousy, deregulation refers to the reduction, or at least the simplification, of the existing arsenal of legal rules in a legal context. It is a different way (a different technique) of controlling society whereby social control is entrusted to another instrument of social control like the mechanism of the (theoretically) free market. In economics, on the other hand, deregulation is often used to refer to the liberalization of the competitive conditions on a market: Cousy (1998), pp. 148–150. In this monograph, unless otherwise indicated, deregulation will refer to Cousy’s description of deregulation in a legal context as provided above.
86.
Art. 132(2) Solvency II. The prudent person principle applies to the management of all assets including the assets covering technical provisions. Such can be deduced from the fact that Solvency II’s rule on asset coverage of technical provisions in question is specified in article 132(2), second paragraph of Solvency II entitled Prudent person principle and from Solvency II’s consideration specifying that “[a]ll investments held by insurance (…) undertakings should be managed in accordance with the prudent person principle.”: Consideration 71 Solvency II (personally added underlineation). As such, all assets, including the assets used to cover for technical provisions should be managed in accordance with the prudent person principle.
87.
Cousy (1998), p. 150.
88.
Art. 22 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 20 Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 12.
89.
Art. 22 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 20 Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 12.
90.
Art. 23(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 21(1) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 12.
91.
Art. 23(1), A, B and C Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 21(1), A, B and C Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 12.
92.
Art. 23(3), first paragraph Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 21(1), third paragraph Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 13.
93.
Art. 23(3), second paragraph Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 21; Art. 21(1), fourth paragraph Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 13.
94.
U.S. Government Accountability Office (GAO) (1993), p. 35.
95.
Clemeur (1980), p. 53; Battista and Paltrinieri (2017), p. 369; Stanyer and Satchell (1980), pp. xix–10.
96.
Art. 24(2), (i) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 22; Art. 22(2), (i) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 14.
97.
Art. 24(1), (a) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 22; Art. 22(1), (a) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 13.
98.
Art. 24(2) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 22; Art. 22(2) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 14.
99.
Art. 24(3) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 23; Art. 22(3) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 14.
100.
Art. 24(3), first bullet point Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 23; Art. 22(3), first bullet point Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 14.
101.
Art 132(2), third and fourth paragraph Solvency II.
102.
Cousy and Dreesen (1997), p. 157.
103.
Cousy and Dreesen (1997), p. 156.
104.
François (1999), p. 133.
105.
Cousy and Dreesen (1997), p. 156.
106.
Such a re-insertion would be beneficial to asset diversification in this context as Paul Windels (Assuralia) pointed out to me in an in interview—that took place over the phone of the 9th of January 2018—that there was more asset diversification under Solvency I than there is today under Solvency II (at least in Belgium’s case).
107.
According to Solvency I, Member States were supposed to give more limitative treatment to “securities which are not dealt in on a regulated market, as compared with those which are”: Art. 24(3), third bullet point Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 23; Art. 22(3), third bullet point Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 14. A similar rules exists today for undertakings for collective investment in transferable securities: Art. 50 Directive of the European Parliament and of the Council of 16 September 2009 relating to insurance against civil liability in respect of the use motor vehicles, and the enforcement of the obligation to ensure against such liability, Pb.L. 7 October 2009, episode 302, 62. My law reform design suggestion would go further and limit the investment into all securities (and other assets that were shown to be dangerous investments in the last financial and economic crisis) when it comes to the coverage of technical provisions. It would also be a quantitative limitation as qualitative limitations give too much power to the legally controlled entity, in casu the insurance undertaking, as explained in this subchapter.
108.
Rickards (2014), p. 289.
109.
Rickards (2014), pp. 289–300.
110.
Of course, times change. What is considered robust today is not necessary robust tomorrow. However, in line with the arguments of this monograph, this is not a problem and, as such, certainly does not mean that it is adviseable to work with guiding principles that do not require adjustment as they can be interpreted in whatever way one likes, when it comes to such important matters as the coverage of technical provisions by assets. As explicated in the first part of the monograph, change (and infinite context-breaking) is good; making structures that create opportunities for their correction out of every occasion for their reproduction is good; whatever moves shall stay. Ensuing, when the times change and research will suggest new ways to make an investment portfolio robust (if investment portfolios remain to exist), the law could simply be adjusted and aligned with the spirit of the time.
111.
Originally, the first directives concerning the business of insurance undertakings (including their solvency) referred to the “adequate solvency margin”: Art. 18, section 1 Directive of the Council nr. 79/267/EEC, 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct life assurance, Pb.L. 13 March 1979, episode 63, 9; art. 16(1), section 1 Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 10. These directives were amended and the terminology was slightly altered from the original adequate solvency margin to the “adequate available solvency margin”: Art. 1(2), Article 18(1) Directive of the European Parliament and of the Council nr. 2002/12/EC, 5 March 2002 amending Council Directive 79/267/EEC as regards to the solvency margin requirements for life assurance undertakings, Pb.L. 20 March 2002, episode 77, 12; art. 1(2), Article 16(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 18. The terminology of adequate available solvency margin applied until Solvency II: Art. 27(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 24; Art. 1(2), Article 16(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 18. A similar terminological evolution occurred for the solvency margin requirements (required solvency margin), at least for the solvency margin requirements of life-insurance undertakings (there is namely no specific terminology in the first directive concerning the business of non-life insurance undertakings ((including their solvency)) equivalent to the solvency margin requirements). Originally, the first directive concerning the business of life insurance undertakings (including their solvency) referred to the “minimum solvency margin”: Art. 19, section 1 Directive of the Council nr. 79/267/EEC, 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct life assurance, Pb.L. 13 March 1979, episode 63, 10. This directive was amended and the terminology was slightly altered from the original minimum solvency margin to the “required solvency margin”: Art. 1(2), Article 19(1) Directive of the European Parliament and of the Council nr. 2002/12/EC, 5 March 2002 amending Council Directive 79/267/EEC as regards to the solvency margin requirements for life assurance undertakings, Pb.L. 20 March 2002, episode 77, 13. The terminology of the solvency margin requirements or more literally the terminology of the required solvency margin applied till Solvency II: Art. 28(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 25; art. 1(3), Article 16a(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 20.
112.
Alberti (2001), p. 5. Without further ado, the definition of the solvency margin as a supplementary reserve consisting mainly out of free assets to protect against business fluctuations can be found directly in EU legislation: Consideration 7 Directive of the Council nr. 79/267/EEC, 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct life assurance, Pb.L. 13 March 1979, episode 63, 2; Consideration 9 Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 4.
113.
Alberti (2001), p. 5. Without further ado, the definition of the solvency margin as a supplementary reserve consisting mainly out of free assets to protect against business fluctuations could also be directly found in the legislation: Consideration 7 Directive of the Council nr. 79/267/EEC, 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct life assurance, Pb.L. 13 March 1979, episode 63, 2; Consideration 9 Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 4. It is thus the amount of funds and insurance undertaking is obligated to hold by the EU legislator to cover for unforeseen events.
114.
As mentioned earlier (see Sect. 8.1), technical provisions can be defined as provisions set aside for claims of policyholders and beneficiaries that are situated on the liabilities side of a balance sheet of an insurance undertaking in the form of debt to these policyholders and beneficiaries: Ayadi and O’Brien (2006), p. 34. Hence they are “the funds that [insurance undertakings] ‘reserve’ to be in a position to settle their contractual obligations and correspond to the estimation of these insurance commitments. (…) In theory, if technical provisions are properly valued and if the value of investments does not fall, then an [insurance undertaking] holding enough assets to cover its technical provisions will be able to meet his obligations in the future. However, it is extremely difficult to estimate future commitments over time. Therefore, for prudential purposes, insurers are usually required to hold a ‘buffer’ (…) above the technical provisions to ensure that they will be able to absorb unexpected changes in the value of their assets and liabilities and thus still meet their obligations to policyholders.”: SEC(07)871 [Internal document of the Secretariat-General nr. 871 of 2007], Annex A.4. Hence, a solvency margin, can be regarded as additional funds that an insurance undertaking needs to hold to remain solvent because of the special kind of business it is involved in and the special kind of consumer they have dealings with.
115.
Van Hulle (2008), p. 1033.
116.
Alberti (2001), p. 6.
117.
Art. 28, 37(2), 38 and 39 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 25 and 28–29; art. 1(3), Article 16a and 1(4), Article 17(2-5) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 20 and 21; art. 22(1), b Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 13.
118.
Art. 27(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 24; art. 1(2), Article 16(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 18.
119.
Art. 27(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 24; art. 1(2), Article 16(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 18.
120.
Pentikaϊnen (1967), p. 243. Pentikaϊnen, an outstanding academic, public and private sector protagonist and actuary from Finland has researched solvency from both the classic and economic approach. His work is of particular interest since the future solvency regime, Solvency II is very similar to the Finnish system, as pointed out by Rantala: Sandström (2011), p. 11.
121.
Alberti (2001), p. 9.
122.
Alberti (2001), p. 9.
123.
Recital 39 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4; Recital 9 Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 4.
124.
Alberti (2001), p. 5.
125.
The terminology of capital adequacy requirements is synonymous to the terminology of capital requirements (determining adequate capital) used by the BCBS and to the terminology of own funds requirements used by the EU legislator. In case of point, see: Basel II; COM(13)690 [Commission document nr. 690 of 2013], 13. Because the current comparison concerns Basel II, the terminology of capital requirements will be used throughout the comparison In question, even though, in essence, all three terminologies have the same meaning.
126.
Gup (2011), p. 189. As with solvency, there are several perspectives from which capital can be defined. Capital for instance has a different meaning to an accountant than to the comparatively conservative legislator. From the legal perspective capital is not simply a deduction of the value of the liabilities from the value of the assets. It is broadly speaking anything that is freely available to absorb both expected and unexpected losses of a bank. There are different forms or rather types of capital which serve different purposes (and therefore said to have different qualities), usually referred to as tiers. Tier 1 is known as the Common Equity Tier 1 (CET1) capital in the EU. It is the going concern capital that allows a bank to continue its activities and aids in the prevention of insolvency. Tier 2 capital on the other hand is the gone concern capital which is the capital supposed to ensure that when a bank does fail, the losses are only carried by the contributors of the bank capital whilst the depositors, bondholders and other senior creditors (mainly consumers) can be repaid in full—the made distinction between going concern capital and gone concern capital stems from a 2007 Financial Services Authority (FSA) discussion paper entitled Definition of Capital. The most prominent difference between these two tiers is the characteristic of permanence; tier 1 capital is permanent unlike tier 2 capital, meaning that the terms of which the capital is issued do not provide for any repayment date. Currently, the EU utilizes tier 1 and tier 2 capital (the precise definitions of which can be respectively found in articles 25 and 79 CRR) as did Basle I before the arrival of its successor. In order for capital to absorb losses while the bank is a going concern (during periods of financial health or financial stress), to maintain market confidence and to avoid disrupting depositors and in order for capital to absorb losses in an actual gone concern scenario, to protect the depositors in a winding up, the legislator designs capital requirements for banks, similar to the solvency margin requirements of Solvency I for insurance undertakings. Specifically speaking, capital requirements are the amount of capital a bank needs to hold in comparison to the amount of assets, to cover any expected and unexpected losses: Gleeson (2010), pp. 45–50. Gleeson’s reference to a discussion paper on capital of the FSA was in concern to the following: Financial Services Authority, “Definition of Capital”, FSA Discussion Paper 2007, 3–56.
127.
Gup (2011), p. 190. Moreover, many bank managers don’t see why legislators get involved and require certain amounts of bank capital to be held at all times. Their argument is that ordinary bank business analysis produces an optimum level of capital to which banks will naturally gravitate as it maximizes return of equity: Gleeson (2010), p. 21. The same core counterargument as was used for the necessity of special legislation and supervision for the solvency of insurance undertakings can be used in this case. Banks are not just private companies at the end of the day, they also perform a public function of transmitting and creating money in the economy. Moreover, the asymmetry problem in the bank business is such that bank managers are not incentivized to differentiate between small and big failing. Bank managers will lose their job in any case of failing, hence there is more incentive to take a big risk that can result in a big success as in the case of a big fail, most probably than not, it will only cost the public purse: Gleeson (2010), p. 21. Moreover, there is no truth to claims of bank managers suggesting that higher capital requirements limit economic growth as banks will restrict lending. “[C]apital [adequacy] requirements do not prevent banks from lending. Claims suggesting that they do are nonsensical and fallacious” Admati and Hellwig (2013), p. 97.
128.
Walker (2001), p. xxii.
129.
COM(07)361 final [Commission document nr. 361 of 2007, final version], 2. More recently the European Commission has identified general and specific problems with the imminent Solvency II system and has graphically organized these problems in a so-called problems tree. The latest identified problem that surfaced after the last financial and economic crisis concerns the insufficient appetite that insurance undertakings possess for long-term investment which contributes the difficult access to capital in the EU, hindering economic recovery: SWD(14)308 final [Staff Working Document nr. 308 of 2014, final version], 3–4.
130.
Art. 1(3) Directive of the European Parliament and of the Council nr. 2013/58/EU, 11 December 2013 amending Directive 2009/138/EC (Solvency II) as regards the date for its transposition and the date of its application, and the date of repeal of certain Directives (Solvency I), Pb.L. 18 December 2013, episode 341, 1 (hereinafter: Quick Fix II).
131.
In regards to Solvency I, only the main rules will be discussed in the current subchapter. Generally, detailed rules and exceptions will not be referred to, giving the illustration a crude character.
132.
Art 27(2) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 24.
133.
Recital 39 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 4.
134.
Art. 28(1) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 25.
135.
Art. 29(1), 29(2), section 1 and 30 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 26.
136.
Art. 1(3), Article 16a(1) Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 20. For the determination or rather calculation of the required solvency margin, prior to its amendments referred to as solvency margin in the original non-life insurance directive see: Art. 16(2) Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 10.
137.
Art. 1(2), Article 16, Article 16a and 1(4), Article 17 Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 18–21.
138.
Alberti (2001), p. 11.
139.
O’Donovan (2011), p. 1.
140.
U.S. Government Accountability Office (GAO) (1993), pp. 36–37.
141.
Art. 29(2) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 26; Notice of the Commission nr. 2011/C 365/06 regarding the adaptation in line with inflation of certain amounts laid down in the life and non-life insurance directives, Pb.C. 15 December 2011, episode 365, 5.
142.
Art. 1(4), (2), first paragraph Directive of the European Parliament and of the Council nr. 2002/13/EC, 5 March 2002 amending Council Directive 73/239/EEC as regards to the solvency margin requirements for non-life insurance undertakings, Pb.L. 20 March 2002, episode 77, 21; Notice of the Commission nr. 2011/C 365/06 regarding the adaptation in line with inflation of certain amounts laid down in the life and non-life insurance directives, Pb.C. 15 December 2011, episode 365, 5.
143.
Generally speaking, asset valuation in the process involving the estimation of the market value of a financial asset. Assets (and liabilities) are valued for a number of purposes including the generation of information for internal and external reporting, internal and external control, resource allocation, company performance assessment and for getting the basis for realization of assets. It is also used for determining insurance cover and risk exposure. Valuations are of the required in the contexts of investment analysis, financial reporting, merger and acquisition transactions, litigation, taxable events, capital budgeting etc.: Sandström (2011), p. 87.
144.
Gatzert and Weskers (2012), p. 554.
145.
Art. 75(1), a Solvency II directive.
146.
Art. 75(1), b Solvency II directive.
147.
Art. 75(1), section 2 Solvency II directive. This provision is an International Financial Reporting Standards (IFRS) prudential correction, necessary to prohibit an insurance undertaking with financial struggles as a result of a low credit rating, to book a revenue because the fair value of her liabilities has decreased: Van Hulle (2008), p. 1034.
148.
Van Hulle (2008), p. 1034; Gatzert and Weskers (2012), p. 554.
149.
Recital 46 Solvency II directive.
150.
Gatzert and Weskers (2012), p. 554.
151.
Gatzert and Weskers (2012), p. 554.
152.
Van Hulle (2008), p. 1034; Gatzert and Weskers (2012), p. 555.
153.
COM(07)361 final [Commission document nr. 361 of 2007, final version], 10. An economic total balance sheet approach is an epileptic phrase to imply that Solvency II directive’s pillar 1 employs a balance sheet based on accounting approaches with market-consistent values to value both assets and liabilities. In the words of the European Commission itself, this “approach relies on an appraisal of the whole balance-sheet of insurance (…) undertakings, on an integrated basis, where assets and liabilities are valued consistently. Such an approach implies that the amount of available financial resources of insurance (…) undertakings should cover its overall financial requirements, i.e. the sum of un-subordinated liabilities and capital requirements. As a consequence of this approach, eligible own funds (…) are much higher than the Solvency Capital Requirement.”: COM(07)361 final [Commission document nr. 361 of 2007, final version], 10.
154.
Gatzert and Weskers (2012), pp. 554–555.
155.
Gatzert and Weskers (2012), p. 554.
156.
Basel II, 160.
157.
Van Hulle (2008), pp. 1034–135; Cousy and Dreesen (2009), p. 156; Cousy (2010), p. 111. Van Hulle, in the article mentioned above, has mentioned that to combat this, technical provisions need to be valued to the sum of a best estimate and a risk margin. This rule can be found in article 77 of the Solvency II directive. Moreover, EIOPA 2014 has issued guidelines on the valuation of technical provisions. These guidelines can be found on the following website: https://eiopa.europa.eu/Publications/Guidelines/TP_Final_document_EN.pdf.
158.
Cousy and Dreesen (2009), p. 148.
159.
Di Lorenzo and Magenta (2017), p. 286.
160.
COM(07)361 final [Commission document nr. 361 of 2007, final version], 11.
161.
Art. 100, section 1 and 129(1), b Solvency II directive; Basel II, 166; Gatzert and Weskers (2012), p. 549.
162.
Basel II, 14–16.
163.
Art. 87 Solvency II directive.
164.
Art. 88 Solvency II directive.
165.
Art. 89(1) Solvency II directive.
166.
Art. 93(1) Solvency II directive; Gatzert and Weskers (2012), p. 549; Di Lorenzo and Magenta (2017), p. 286.
167.
See Sect. 10.4.1.2.
168.
Art. 93(1), (a) Solvency II directive.
169.
Art. 93(1), (a) Solvency II directive.
170.
Art. 93(2), Solvency II directive.
171.
Art. 94 Solvency II directive; Gatzert and Weskers (2012), p. 550. It should be noted that the described classification is the main classification employed in the Solvency II directive. It is however not the only one. There is also a classification of specific insurance own funds items described in article 96 of the Solvency II directive.
172.
Laas and Sieger (2015), p. 16; Sandström (2011), p. 429.
173.
Di Lorenzo and Magenta (2017), p. 286.
174.
Basel II, 12. This has been altered under Basel III. Due to the newly introduction of the capital conservation buffer, Basel III can be said to head in the direction of a two-level approach: Gatzert and Weskers (2012), p. 549.
175.
Laas and Sieger (2015), p. 12.
176.
Basel II, 166.
177.
Basel II, 14.
178.
Basel II, 14.
179.
Basel II, 16.
180.
Gup (2011), pp. 194–195; Gleeson (2010), p. 44.
181.
Van Hulle (2008), p. 1035; Gatzert and Weskers (2012), p. 548; Sandström (2011), p. 21.
182.
Gatzert and Weskers (2012), p. 548.
183.
Recital 60 Solvency II directive.
184.
Art. 98(3) Solvency II directive.
185.
As such, Solvency II innovates in comparison to its predecessor by taking market risk into consideration: COM(14)168 final [Commission document nr. 168 of 2014, final version], 5. This meant that insurance undertakings, under Solvency I, did not have to hold financial resources (capital), against the risk of holding equity investments, or any other volatile or risky financial asset: http://ec.europa.eu/internal_market/insurance/docs/solvency/solvency2/faq_en.pdf.
186.
Art. 101(4) Solvency II directive.
187.
Taylor (2004), p. 127.
188.
Recital 60 Solvency II directive.
189.
Art. 129(1), b Solvency II directive.
190.
Sandström (2011), p. 21.
191.
Recital 69 Solvency II directive.
192.
Gatzert and Weskers (2012), p. 548.
193.
Art. 129(3), section 1 Solvency II directive.
194.
Art. 98(4) Solvency II directive.
195.
Art. 99 Solvency II directive.
196.
Art. 98(1) Solvency II directive.
197.
Art. 98(2) Solvency II directive.
198.
Of course calculations of the actual capital requirements themselves are in existence in both Basel II and the Solvency II directive as well. According to Gatzert and Wesker these calculations differ to a large extent:
Gatzert and Weskers (2012), p. 551. Because of the technical nature of these calculations and mainly because the calculation rules that lend themselves for a comparison are present in the Solvency II delegated regulation (Lamfalussy level 2) and not in the Solvency II directive, thus falling outside the scope of the current article, they will not be discussed.
199.
There are two internal ratings-based approaches. Two variations so to speak: The foundation IRB approach and the advanced IRB approach. Both of these use the bank’s internal risk assessments of key risk drivers and do not rely upon external credit assessments: Taylor (2004), pp. 124–125. As a result, “banks themselves determine the exposure based on their own estimates”: Ballegeer (2011), p. 149.
200.
Gatzert and Weskers (2012), p. 551. A more thorough and technical description of risk calculation contained in Basel II falls beyond the scope of the current article. For those who are seeking for a good explanation on the matter a segment from the following monograph is recommended: De Weert (2012), pp. 79–90.
201.
Basel II, 19. These ECAIs need to be recognized by national supervisors. Basel II provides criteria for recognizing ECAIs: Basel II, 27–28.
202.
Gatzert and Weskers (2012), p. 550.
203.
Art. 100, section 2 Solvency II directive. The SCR needs to be calculated at least once a year: Art. 102(1) Solvency II directive.
204.
Art. 129(2) Solvency II directive.
205.
Art. 129 and 130 Solvency II directive. The MCR needs to be calculated at least quarterly within a year: Art. 129(4), section 1 Solvency II directive.
206.
Art. 4(1) Solvency II delegated regulation.
207.
Stotanova and Grüdl have argued that under the SCR standard formula, “policyholders are not always sufficiently protected since the distributional assumptions for calculating the default probability and SCR are not tailor-made and the actual insolvency risk can deviate from the regulatorily [sic] admissible risk.”: Stoyanova and Grüdl (2014), p. 435.
208.
Art. 103, section 1, c Solvency II directive.
209.
Art. 104(1) Solvency II directive.
210.
Art. 105 Solvency II.
211.
Art. 104(7), section 1 Solvency II.
212.
Art. 109 Solvency II directive.
213.
Art. 110 Solvency II directive.
214.
Art. 111 Solvency II directive.
215.
Art. 112(1) Solvency II directive.
216.
Art. 112–127 Solvency II directive.
217.
The assessment of credit risk in Basel II is not truly principle-based but a combination of the principle-based and rules-based approach: Gatzert and Weskers (2012), pp. 551–552.
218.
In a principle based approach, capital requirements are calculated based on a risk-assessment by the legally controlled entity itself, in casu the insurance undertaking, in accordance with certain prescribed principles”: Gatzert and Weskers (2012), p. 551. What a principles based approach is overall and what the issues are associated to it have been discussed earlier (see Chap. 9).
219.
Gatzert and Weskers (2012), p. 551.
220.
“In a rules-based approach capital requirements are based on stipulated rules”: Gatzert and Weskers (2012), p. 551. A general explanation of the rules-based approach is has been given earlier (see Chap. 9).
Gatzert and Weskers (2012), p. 551.
221.
Gatzert and Weskers (2012), p. 551.
222.
Cousy and Dreesen (2009), p. 160 (personal translation).
223.
Basel II version 2006, 98–99; Art. 120 Solvency II directive.
224.
Gleeson (2010), p. 115.
225.
Gleeson (2010), p. 115.
226.
Art. 120(1) and (2) Solvency II.
227.
Kwatra and Erasmus (2009), p. 60; O’Donovan (2011), p. 7. Regarding the Solvency II directive, Cousy has pointed out that meeting the use test rules is expected to be a difficult task for insurance undertakings and their managers: Cousy (2010), p. 115. Ensuing, it should therefore not come as a surprise that according to the latest data, the majority of insurance undertakings is Belgium use the standard model: X (2017), p. 23.
228.
See Sect. 10.4.2.4.
229.
Art. 101(3), section 2 Solvency II directive. Within the second section of article 101(3) of the Solvency II directive it is specified that the SCR covers existing business as well as new business expected to be written over the following 12 months. Hence the time perspective of the Solvency II directive is prospective whereas Basel II employs a retrospective time perspective: Gatzert and Weskers (2012), p. 550.
230.
Recital 64 Solvency II directive.
231.
Recital 62 Solvency II directive.
232.
Art, 101(1), c Solvency II directive.
233.
Gatzert and Weskers (2012), p. 550.
234.
Gatzert and Weskers (2012), p. 550.
235.
Focarelli (2017), p. 351.
236.
Focarelli (2017), p. 352 (personally added underlineation).
237.
I am much indebted to Paul Windels (Assuralia) for this insight. Namely, in my interview with Paul Windels—that took place over the phone on the 9th of January 2018—he stressed how the one-year VaR horizon would drive (Belgian) insurance undertakings out of the business of life insurance and would discourage long-term investment.
238.
Sandström (2011), p. 213. As such, it “is an attempt to provide a single number summarizing the total risk in a portfolio of financial assets. (…) When using the value-at-risk measure, an analyst is interested in making a statement of the following form: I am X percent certain there will not be a loss of more than V dollars in the next N days. (…) In essence, it asks the simple question ‘How bad can things get?’”: Hull (2012), pp. 471–472.
239.
European Commission (2017), http://ec.europa.eu/internal_market/insurance/docs/solvency/solvency2/faq_en.pdf.
240.
Taleb (2010), p. 225.
241.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
242.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
243.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009 (personally added underlineation).
244.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009 (personally added underlineation).
245.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
246.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009. In a more succinct fashion, Jorion has made the same point in regard to VaR: P. Jorion, “Comment by the Chairholder. Woe to Us: Downstream rather than Upstream!” in Byttebier and Delvoie (2015), p. 8. Moreover, it is perhaps important to note that (excess) kurtosis is a measure of whether a series of investment returns has more extreme results than would be suggested by the normal distribution. A distribution with more than expected extreme results is called leptokurtic. This phenomenon is more commonly referred to as ‘fat tails’.”; Stanyer and Satchell (1980), p. 285 (personally added underlineation).
247.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
248.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009. Surpassingly, it should be mentioned that Rickards’s The Death of Money: The Coming Collapse of the International System has been relied upon in my chapter The market as an exchange of goods and services and an opportunity to specialize and not his speech.
249.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009 (personally added underlineation).
250.
Taleb (2010), p. xxix. Taleb has gone so far as to call the bell curve the Great Intellectual Fraud (GIF): Taleb (2010), pp. xxix–230.
251.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
252.
Floreani (2016), p. 261.
253.
COM(14)158 final [Commission document nr. 158 of 2014 final version], 126 (personally added underlineation).
254.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
255.
Art. 27 Solvency II directive.
256.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
257.
O’Shea (2013), p. 3; Flamée (2015), p. 2.
258.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
259.
Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009 (personally added underlineation).
260.
Sandström (2011), p. 131; Ayadi and O’Brien (2006), p. 34. It can also be said that by investing, undertakings “tailor the flows of expenditure and receipts over a period of time”: Sandström (2011), p. 131.
261.
Art. 24(5) Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 23; Art. 18(1) Directive of the Council nr. 73/239/EEC, 24 July 1973 on the coordination of laws, Regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Pb.L. 16 August 1973, episode 228, 11; Art. 22(5) Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 15; Art. 133(1) Solvency II.
262.
Art. 133 Solvency II.
263.
Art. 133(1) Solvency II directive.
264.
Art. 133(1) and (2) Solvency II directive.
265.
Consideration 38 Directive of the European Parliament and of the Council nr. 2002/83/EC, 5 November 2002 concerning life assurance, Pb.L. 19 December 2002, episode 345, 23; Consideration 14 Directive of the Council nr. 92/49/EEC, 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive), Pb.L. 11 August 1992, episode 228, 2.
266.
Consideration 72 Solvency II directive.
267.
Cousy (2010), p. 112.
268.
It needs to be noted that Solvency II does specify that investment in derivatives is only allowed in so far as they contribute to a reduction of risks or facilitate efficient portfolio management: Art. 132(4), section 2 Solvency II. However, abiding by argument, investment in derivatives and the reduction of risk are in direct contradiction to each other. Also, efficiency in regard to portfolio management is very ambiguous: The facilitation of an efficient portfolio management does not have any clear meaning. If an efficient portfolio management is supposed to be interpreted as portfolio management with the goal of profit maximization this actually comes down to a very risky portfolio management. Moreover, as Van Hulle has pointed out, Solvency II sets some limitations on the investment in securities (art. 135(2) Solvency II). However, these limitations are qualitative which means that the legally controlled entity, in casu the insurance undertaking, ultimately has the last word: Van Hulle (2009), p. 43; Cousy and Dreesen have also touched upon this point in their article: Cousy and Dreesen (2009), p. 157.
269.
Art. 132 Solvency II directive.
270.
Sandström (2011), p. 131.
271.
Art. 132(2), section 1 and section 2 Solvency II directive.
272.
Art. 135 Solvency II directive.
273.
The European Commission refers to classes of assets to which risk factors are assigned as buckets: SWD(14)308 final [Staff Working Document nr. 308 of 2014, final version], 8.
274.
In theory investment is seen as free since no limitations exist in concern to which assets a bank or insurance undertaking can invest. The point being made here however is that because different assets have different risks weights ascribed to them by Basel II and the Solvency II directive (the risk of the investments needs to be reflected in the capital requirements), investment is not really free for the banks and insurance companies seeking to make profit. In our modern-day capitalistic system this means that most banks and insurance companies are not free indeed to invest in whatever assets they want. In regards of the Solvency II directive and its implementing measures the European Commission is aware of the argument that capital requirements have the ability to influence the investment behavior of insurance undertakings: COM(14)168 final [Commission document nr. 168 of 2014, final version], 5–6.
275.
Laas and Sieger (2015), p. 13. This comparison has been checked and is indeed correct. For instance, see the following rules in the instruments: Basel II, 19, 20 and 167; Art. 44(2) Solvency II delegated regulation. When both instruments talk about government bonds it seems that bonds of both the central government (the sovereign) and the central banks are envisioned: Basel II, 19; Art. 50, section II Solvency II delegated regulation. Cousy has also asked himself the questions “whether there is no inducement here to invest in bonds rather than in shares, and whether there is no danger for a negative influence on stock markets? Will Solvency II not have a detrimental effect on stock markets, especially in a post-crisis era, where economic actors are in need of investment [?]”: Cousy (2010), p. 114.
276.
Gleeson (2010), p. 35.
277.
Kälbrerer et al. (2014), p. 33.
278.
Battista and Paltrinieri (2017), p. 372. Cousy and Dreesen have also touched upon this point in their article: Cousy and Dreesen (2009), p. 157.
279.
Battista and Paltrinieri (2017), p. 372.
280.
Van Der Elst (2015), p. 16.
281.
EU Member States were originally asked to comply with large parts of the Solvency II directive by the 31st of October 2012: Art. 309(1), first paragraph Solvency II directive. As for the rules of Solvency II not mentioned in its article 309, Solvency II specified that they would apply from the first of November 2012. Moreover, Solvency II specified that it would enter into force at the end of December 2009: Art. 311 Solvency II directive. This explains why Solvency II already had an effect on the behavior of insurance undertakings at the end of 2011. However, both the transposition date and the application date of Solvency II were postponed twice: Art. 1 Directive of the European Parliament and of the Council nr. 2012/23/EU, 12 September 2012 amending Directive 2009/138/EC (Solvency II) as regards the date for its transposition and the date of its application, and the date of repeal of certain Directives, Pb.L. 14 September 2012, episode 241, 2 (hereinafter: Quick Fix I); Art. 1 Quick Fix II.
282.
X, “Kerncijfers en voornaamste resultaten van de Belgische verzekeringsmarkt in 2011”, Assurinfo 2012, 8. Moreover, according to Focarelli, insurance undertakings in the EU have been incorporating Solvency II in their asset allocation decisions since at least 2005: Focarelli (2017), p. 350.
283.
X, “Kerncijfers en voornaamste resultaten van de Belgische verzekeringsmarkt in 2011”, Assurinfo 2012, 8.
284.
X (2017), p. 8.
285.
COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 6.
286.
Consideration 1 Quick Fix II.
287.
Stanyer and Satchell (1980), pp. 52–53.
288.
Adamczyk and Windisch (2015), p. 1.
289.
COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 21.
290.
Flamée (2015), p. 3.
291.
COM(14)168 final [Commission document nr. 158 of 2014, final version], 22 (personally added underlineation). As such, the Europe 2020 strategy “emphasizes smart, sustainable and inclusive growth as a way to strengthen the EU economy and prepare its structure for the challenges for the next decade. The strategy strives to deliver high levels of employment, productivity and social cohesion in the Member States while reducing the impact on the natural environment. (…) The Europe 2020 strategy puts forward three mutually reinforcing priorities to make Europe a smarter, more sustainable and more inclusive place to live: • Smart growth, through the development of an economy based on knowledge, research and innovation. • Sustainable growth, through the promotion of resource-efficient, green and competitive markets. • Inclusive growth, through policies aimed at fostering job creation and poverty reduction.”: EUROSTAT (2017), pp. 8 and 15. Perhaps it is useful to place the emphasis here that an increase in economic activity, i.e. economic growth, does not automatically lead to an increase in welfare: Müller and Selvig (2008), p. 31.
292.
In accordance with the Europe 2020 strategy, smart investment means investment in knowledge and innovation: COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 10. As pointed out earlier, there are discussions taking place of making knowledge and innovation the fifth freedom in the EU (see Sect. 8.3.1).
293.
In accordance with the Europe 2020 strategy, sustainable investment means investment promoting a more resource efficient, greener and more competitive economy: COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 10. In the EU context, sustainability, in general, has been at the heart of the EU project and EU treaties recognize its social and environmental dimensions: COM(18)97 final [Commission document nr. 97 of 2018, final version], 1. It “means making economic prosperity long-lasting, more socially inclusive and less dependent on exploitation of finite resources and the natural environment.”: Sustainable finance report, 3. Sustainable investment can be linked to sustainable finance which “generally refers to the process of the process of taking due account of environmental an social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities.”: COM(18)97 final [Commission document nr. 97 of 2018, final version], 2.
294.
In accordance with the Europe 2020 strategy, inclusive investment means investment fostering a high-employment economy delivering economic, social and territorial cohesion: COM(10)2020 final [Commission document nr. 2020 of 2010, final version], 10.
295.
In the context of the Europe 2020 strategy, productive investment means investment in “activities which support growth by reducing cost, diversifying means of production and creating jobs in a smart, sustainable and inclusive way.”: COM(14)168 final [Commission document nr. 168 of 2014, final version], 2.
296.
In the context of the Europe 2020 strategy, patient investment means “that investors take into account the long-term performance and risks of their investments, rather than short-term price fluctuations. This long-term perspective acts in a counter-cyclical manner and promotes financial stability.”: COM(14)168 final [Commission document nr. 168 of 2014, final version], 2. For a connection between patient capital and the investment of insurance (Solvency II), see: COM(15)468 final [Commission document nr. 468 of 2015, final version], 5.
297.
In the context of the Europe 2020 strategy, engaged investment means “that investors take longer-term aspects such as environmental, social governance issues into account in their investment strategies.”: COM(14)168 final [Commission document nr. 168 of 2014, final version], 2. As such engaged investments would particularly refer to investments in the non-financial sector. Today this sector only represents a marginal portion of the total assets of insurance undertakings (7%): Focarelli (2017), p. 340. Moreover, at the moment the EU is developing a unified classification system for sustainable activities. Namely, “[a] shift of capital flows towards more sustainable economic activities has to be underpinned by a shared understanding of what ‘sustainable’ means. A unified EU classification system - or taxonomy - will provide clarity on which activities can be considered ‘sustainable’. (…) Clear guidance on activities qualifying as contributing to climate change mitigation and adaptation, environmental and social objectives will help inform investors. It will provide detailed information on the relevant sectors and activities, based on screening criteria, thresholds and metrics. This is an essential step in supporting the flow of capital into sustainable sectors in need of financing. An EU taxonomy will be gradually integrated into EU legislation to provide more legal certainty.”: COM(18)97 final [Commission document nr. 97 of 2018 final version], 4. Also, see: Sustainable finance report, 15.
298.
As such, the PPP would need to be interpreted as entailing a duty for institutional investors to consider sustainability factors. The European Commission is certainly in favour of such a duty (not per se via the PPP) but has stressed that at the moment that this duty is clearly defined: COM(18)97 final [Commission document nr. 97 of 2018 final version], 8. Also, see: Sustainable finance report, 20.
299.
Stiegler (2014), p. 5. The European Commission has also emphasized this whilst acknowledging that Solvency II does not correspond to the long-term business model of insurance undertakings: Sustainable finance report, 71.
300.
COM(18)97 final [Commission document nr. 97 of 2018 final version], 1. The UN 2030 Agenda is a plan of action for people, the planet and prosperity. It aims at eradication poverty in all its forms and dimensions. The plan recognizes the eradication for poverty is a condition sine qua non for sustainable development: Resolution 70/1 of the General Assembly of the United Nations, UN Doc. A/Res/70/1.
301.
COM(18)97 final [Commission document nr. 97 of 2018 final version], 2.
302.
COM(18)97 final [Commission document nr. 97 of 2018 final version], 1.
303.
Gorz (1989), p. 128. Indeed, market-based investment is characterized by short-termism: Lapavitsas (2013), p. 136.
304.
Focarelli (2017), p. 344.
305.
Giovannini et al. (2015), p. 53.
306.
Lapavitsas (2013), p. 12. Moreover, according to Lapavitsas, “[t]he crisis of 2007, irrespective of its origins, is prima facie evidence of the failure of Basel II”: Lapavitsas (2013), p. 318 (personally added underlineation).
307.
Persaud (2000), pp. 60–63. Persaud has also warned—almost a decade before the Solvency II directive was published—legislators for extending market-sensitive risk management rules to risk management of long-term investors such as insurance undertakings: Persaud (2000), p. 64. Unlike Helliwig (See last paragraph of this subchapter) however, Persaud just makes an observation and does not explicitly advocate a complete abolishment of risk calibration and more specifically, risk-calibrated capital requirements.
308.
Underhill and Zhang (2008), p. 547.
309.
Schwarz et al. (2015), p. 20.
310.
Bernay (2008), p. 478; Sandström (2011), p. 221; Schwarz et al. (2015), p. 20. Concretely, VaR has been considered non-coherent because the aggregation of VaRs underestimates the total amount of risk: Bernay (2008), p. 478.
311.
Focarelli (2017), p. 352. The corrections that exist for this problem are not very effective according to Focarelli due to their piecemeal structure: Focarelli (2017), p. 353. This echoes Jorion’s thesis that patchwork in legislation is not equivalent to fixing the underlying problem: P. Jorion, “Comment by the Chairholder. Woe to Us: Downstream rather than Upstream!” in Byttebier and Delvoie (2015), pp. 7–8.
312.
There are quite a few examples of why Basel II in not an ideal instrument to inspire Solvency II. The current subchapter concentrates on ECAIS and the role regulatory capture has played in Basel II. Other examples that make Basel II a questionable inspirational source is the evidence of the creative ways in which banks managed to evade the Basel II requirements by shifting risks to others or by hiding risks behind flawed risk models: Admati and Hellwig (2013), p. 96.
313.
The National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, Washington, The Financial Crisis Inquiry Commission (official government edition), 2011, xxv.
314.
The National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, Washington, The Financial Crisis Inquiry Commission (official government edition), 2011, xxv. For insurance undertakings the use of credit rating agencies cannot be too much of a good thing either. The OECD has warned of external (credit) rating agencies being able to exert an indirect pressure on insurance undertakings in need of a good rating to attract capital. This could result in insurance undertakings presenting flattering year-end results at the expense of technical provisions without the external (credit) rating agencies being able to spot the manipulation. Also, highly-rated insurance undertakings often feel encouraged to invest in riskier assets which can be dangerous as the last financial and economic crisis showed. On the other hand, a publicly downgraded rating (a reflection of the opinion of the employed credit rating agency) may unnecessary aggravate business difficulties: OECD (2003), p. 111.
315.
The National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, Washington, The Financial Crisis Inquiry Commission (official government edition), 2011, 44.
316.
Daenen (2011), p. 855.
317.
Daenen (2011), p. 864.
318.
The European Commission is aware of the potential problems related to (over)relying on ECAIs in legislation such as the financial stability-threatening herding and cliff effects. As a result, the European Commission has inserted provisions into the Solvency II delegated regulation as an attempt to combat such potential problems. The provisions are in line with the Financial Stability Board’s (FSB) ‘Principles for Reducing Reliance on CRA Rating’ that were endorsed in 2010 by the G20. FSB’s principles are available on the following website: www.financialstabilityboard.org/wp-content/uploads/r_101027.pdf?page_moved=1. A roadmap to accomplish these principles was created and is also available to the public on the following website: www.financialstabilityboard.org/wpcontent/uploads/r_121105b.pdf?page_moved=1. Subsequently, in line with the latter roadmap, a thematic peer review has been conducted in regard of these FSB principles which is available on the following website: www.financialstabilityboard.org/wp-content/uploads/r_140512.pdf. For the actual action plan of the European Commission to convert FSB’s principles for the reduction of reliance on ECAI’s from theory into practice, one can consult the following document: DG MARTK/EU Action Plan to reduce reliance on Credit Rating Agency (CRA) Ratings/2015 [Staff Working Document entitled EU Action Plan to reduce reliance on Credit Rating Agency (CRA) Ratings of 2015], 3. Apart from attempting to reduce reliance on ECAIs’ through the Solvency II system, the European Commission has also launched several cross-sectoral initiatives. For instance, insurance undertakings are obliged to make their own credit risk assessment and are not allowed to solely or mechanistically rely on credit ratings for the assessment of the creditworthiness of an entity or a financial instrument: Art. 1(6), Article 5(a), 1 Regulation of the European Parliament and of the Council nr. 462/2013/EU, 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies, Pb.L. 31 May 2013, episode 146, 13. However, my impression is that this is patchwork for a complex problem that could be easily solved by not allowing insurance undertakings in the EU to rely on ECAIs.
319.
Underhill and Zhang (2008), p. 545.
320.
Rickards (2014), p. 296.
321.
Rickards (2014), pp. 295–298.
322.
Rickards (2014), p. 296.
323.
Oatley and Nabors (1998), pp. 42–46.
324.
Oatley and Nabors (1998), pp. 49–52.
325.
Oatley and Nabors (1998), p. 52.
326.
In regards to Basel III, Lapavitsas has remarked that even though it is a post-crisis creation, its “underlying logic (…) is similar to that of the previous two accords: market-conductive regulation designed by the financial system and aiming to strengthen the solvency of individual financial institutions by improving capital adequacy. (…) [Basel III is] a further legitimation of mark-to-market practices and thus the strengthening of the turn of banks toward trading in open markets. (…) Basel III has reaffirmed the basic principles of market-conforming regulation, designed by banks for banks, focussing on capital adequacy and treating banks largely as participants in open market transactions.”: Lapavitsas (2013), pp. 318–322 (personally added underlineation).
327.
Underhill and Zhang (2008), p. 543. Stigler is considered the first economist to have written an article (1971) on legislation with the argument that it is not designed in the public interest but with the intent to benefit the participants of the legislated business sector (industry): Meier (1988), pp. 18–19.
328.
Solomon (1995), pp. 111–112.
329.
Walker (2001), p. 71. Now, it is not exactly novel to point out that the interests pushed by sectors are more often than not in conflict with social missions of legislators and supervisors. In the context of Basel II specifically this has been pointed out by Kane: Kane (2007), p. 48. Nevertheless, it is rather novel to point out that an instrument that postulates consumer protection, like the Solvency II directive, has been inspired by an instrument that places more emphasis on the invisible market forces and the wellbeing of the companies that are the objects of its control than on consumers.
330.
Casu et al. (2006), p. 166. According to Barr and Miller the point of Basel II being a product of regulatory capture has also been by Wood in his monograph entitled Governing Global Banking: Barr and Miller (2006), p. 19.
331.
“Unsurprisingly, Basel II was strongly supported by the largest international banks, in the expectation that it would allow them to reduce their capital levels”: Verdier (2013), p. 1452.
332.
Casu et al. (2006), p. 166 (personally added italics). In this quote, Casu, Girardone and Molynrux are talking about new capital rules. However, due to the publication date of Introduction to Banking, i.e. the year of 2006, it should be clear that they are referring to Basel II (which was indeed new at the time). As such, Rickards has made the same point about Basel II: Rickards (2009). “The Risks of Financial Modelling: VaR and the Economic Meltdown” testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, Washington, D.C., 10 September 2009.
333.
Hellwig (2010), p. 2; De Bellis (2012), p. 83.
334.
De Bellis (2012), pp. 82–83.
335.
De Bellis (2012), pp. 82–83.
336.
In the context of Solvency II, Grazia Starita and Malafronte have collected the numbers of participants to the QIS’ in regard to the Solvency II project overall and have organized these in a clear diagram: Grazia Starita and Malafronte (2014), pp. 27–28.
337.
De Bellis (2012), p. 103.
338.
De Bellis (2012), pp. 83–84.
339.
De Bellis (2012), p. 104; Admati and Hellwig (2013), p. 96.
340.
Wolfson and Epstein (2013), p. 417 (personally added underlineation); Hellwig (2010), p. 8 (personally added underlineation); Verdier (2013), p. 1429 (personally added underlineation).
341.
Especially since “[a] 2014 survey pictured the size and ‘fire power’ of the financial lobby that us able to lobby over the Eu financial regulation from the drafting stage (Commission expert groups and consultations), to the later decision-making procedures (Parliament consultations and informal lobby meetings with members of the Parliament) and the implementation phase (supervisory agency stakeholder groups). With more than 700 entities, more than 120 million euros annual spending and at least 1700 lobbyists at their disposal, the financial lobby is clearly a powerful voice at all stages and levels of the EU legislation process.”: Marano and Siri (2017), p. 17. The problem of lobbying in the EU is certainly not novel: Craig and De Búrca (1998), pp. 152–153.
342.
Persaud (2000), p. 60. “Is it really enough to tighten a screw here and put in a new nail there?”: Hellwig (2010), p. 2. Such was the metaphor used by Hellwig to convey the same point as Persaud. Persaud’s metaphor has nevertheless been favored in the current article as it fits its context better.
343.
Hellwig (2010), p. 11.
344.
As the explanation to the quote with which I started this monograph indicates, problems and ideas that were once examined, fall out of sight and out of mind only to resurface later as novel and new. As such, in the spirit of moving away from the (theoretically) free market I prefer for the ideology of Solvency I to resurface rather than the ideas behind Basel II.

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Kristina Loguinova

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Loguinova, K. (2019). Ideology of the Substance: Solvency II Versus Solvency I and Basel II. In: A Critical Legal Study of the Ideology Behind Solvency II. Economic and Financial Law & Policy – Shifting Insights & Values, vol 4. Springer, Cham. https://doi.org/10.1007/978-3-030-26357-7_10

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DOI: https://doi.org/10.1007/978-3-030-26357-7_10
Published: 18 October 2019
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