The full entry into force at the start of 2016 of the European Union’s Solvency II risk-based capital framework1 for insurance poses new challenges for supervisory cooperation in Europe. National supervisors must cooperate in the approval and monitoring of international models used by large cross-border insurance groups. The European Insurance and Occupational Pension Authority (EIOPA) plays an important coordination role, but cannot settle disagreements between national supervisors.
Supervisory challenges are present in terms of both management of systemic risk and day-to-day supervision. The common vulnerability of insurers to market risks, in particular the current low interest rate, is a source of systemic risk, and while supervisors might cooperate in day-to-day supervision, cooperation, such as exchange of information and coordinated action, can run less smoothly in times of crisis. Risks are present in the context of a European insurance sector that is highly integrated, with a large and rising share of cross-border business. On average, EU insurance groups conduct 60 percent of their business outside their home country, rising to about 70 percent for large insurers. Europe is home to more globally systemic insurers2 than the Americas or Asia, and European insurers are larger than their American or Asian counterparts measured by gross written premiums.
As the large insurers have become pan-European players, the supervisory balance is tilting from coordination towards centralisation in a possible insurance union. This raises a number of questions. What are the arguments for and against centralisation of insurance supervision? What would be the scope of a possible insurance union? What would the legal basis be? How rapid should the move to insurance union be? In this Policy Brief we set out to answer these questions.