Wolters Kluwer Financial Services

The Principles of Proportionality

George Crooks, Business Analyst, looks at the issue of proportionality and Solvency II directive

Introduction

The issue of proportionality has proven to be very challenging for the European regulators charged with forging the rules and regulations from the Solvency II directive published in 2009. The main problems have been centred on how to apply one regulation across member states where there are so many differing factors to consider, e.g. size of the market, distribution of the market, culture, size and distribution of the firms.

One of the dilemmas facing EIOPA is how best to determine one category of firms that should be classed under the proportionality umbrella across the EU. The authorities must also be considering the fact that proportionality could have detrimental impact on their ability to gather the necessary information in order to achieve the overall stated goal to maintain financial stability across the region.

The broad framework of Solvency II is to understand and manage financial stability issues from a Europe-wide point of view. The idea is for EIOPA to take regular snapshots of the industry by analysing the results from the Quantitative Reporting Templates (QRT), collating the results to better understand and track the financial position of the European insurance sector. In this respect the QRTs will play a vital role for EIOPA and as such the issue of information gathering becomes more acute, due to the fact that through the principles of proportionality firms may be exempt from having to submit some periodic reports e.g. quarterly QRTs.

The problem for the authorities arises in determining the criteria in which firms should be deem to fall under the proportionality umbrella, whilst actively considering the impact of the loss of information on economic stability if those firms were to be excluded from providing important information on a quarterly basis.

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