European Commission Inaction Is Putting The EU’s Insurance Market At Risk

The consensus in a series of papers produced for an Eurofi Seminar in February 2022 was that Solvency II – the prudential regime for insurance and reinsurance undertakings in the EU – has by and large worked well. 

One contributor referred to Solvency II as the “gold standard of insurance regulation”. A paper by the Chairperson of the European Insurance and Occupational Pensions Authority (EIOPA), “the heart of insurance and occupational pensions supervision in the EU” concluded that Solvency II “is definitely an effective framework”.

While the idea of a national supervisory body ‘going rogue may have been far from the minds of those drafting Solvency II or its predecessor it is an issue that needs to be firmly in the minds of those involved in the Solvency II Review.

On 17 September 2021, the Romanian Financial Supervisory Authority (ASF) withdrew the operating license of Romania’s leading insurer, City Insurance SA, and announced that it had triggered bankruptcy proceedings against the company.

Two years earlier, officials from the Romanian FSA reportedly approached Euroins Romania, requesting the company to buy City Insurance. Euroins Romania is part of the Euroins Insurance Group (EIG), which operates across 12 European countries, providing insurance to over 3 million clients in Romania alone. EIG is a subsidiary of Eurohold Bulgaria an energy and financial group listed on the  Warsaw and Sofia Stock Exchanges.

The ASF request that Euroins buy City Insurance was repeated on several occasions. The Chairman of the Supervisory Board of Eurohold, in a widely reported statement, indicated that at one meeting where the request was repeated it was made clear that “we better agree because otherwise, we have no choice.”

Believing City Insurance to be effectively worthless, Euroins Romania and Eurohold resisted the pressure from ASF and refused to buy the company. Following that refusal, relations between Euroins Romania and the Romanian regulator went into a dramatic downward spiral.

Euroins Romania was subjected to continuous inspections by ASF. At one point, ASF put the company into temporary administration.  The basis for this action was that the company’s board members had not been vetted whether they had the necessary qualities for their appointments, an allegation again hotly disputed by Eurohold.

Days before Christmas 2021, ASF issued a decision requiring Euroins Romania to enter a recovery plan. A recovery plan was duly submitted but within days, ASF requested that it be adjusted.

Throughout 2022, there were multiple meetings between Euroins and ASF at which Euroins sought, without success, to meet an ever-changing series of ASF demands.

One of those demands was that Euroins terminate its existing reinsurance contract, an indispensable part of every insurer’s activity, with a non-EU-based company. Neither EU nor Romanian law required that the company providing reinsurance be EU-based.

While the increasingly acrimonious meetings between ASF and Euroins were ongoing, a negative campaign against the company was unleashed in Romanian media. Without any reference to facts the company’s solvency and capacity to operate became the focus of malicious media attention. 

Material relating to Euroins Romania supplied to ASF and covered by the confidentiality provisions of Solvency II somehow featured in that campaign on multiple occasions.

On 10th February, Eurohold issued a press statement remarkable for its forthright language blaming “senior and middle management employees” from ASF as well as “persons who caused the crisis with the Romanian insurance company City Insurance” for the “organized attack against Euroins Romania”. It characterized the actions as threatening “the financial stability of the company“ and described them as a “gross violation not only of local but also of European legislation”.

On 14th March, aware of the damage that was being done by the actions of the Romanian Financial Supervisory Authority and operating within the framework established by Solvency II, the Bulgarian Financial Supervision Commission (FSC) communicated with its Romanian counterpart, ASF, confirming that Euroins Romania was in a strong solvency position. That confirmation was ignored.

In order to address any possible legitimate concerns that ASF might have about Euroins Romania, a series of other related initiatives were taken.

The Euroins Insurance Group [EIG] commissioned a report on the solvency of Euroins Romania from the Group’s auditors.

With support from the European Bank for Reconstruction and Development (EBRD), which has a 10% holding in EIG, a leading global actuarial expert was engaged to carry out an independent analysis of Euroins Romania and its operations. In early April EBRD indicated that the analysis produced no reason for it “to revise (its) view of the strong financial standing” of Euroins Romania.

“We’ve signed an agreement to acquire a minority stake in Bulgaria’s Euroins Insurance Group, one of the largest independent non-life insurance groups in central, eastern and south-Eastern Europe,” said The EBRD in a statment on Twitter.

A separate study of Euroins Romania was commissioned by EU insurance supervisor EIOPA.

However, efforts to persuade ASF to act rationally and to wait until the various reports became available fell on deaf ears.

On 17th March, while the various studies were still in preparation, ASF announced, that it had decided  “to withdraw the operating authorization of Euroins Romania” and that it intended to file a request to start bankruptcy proceedings. The following day, an ASF spokesperson indicated that the action was not taken for “economic reasons” but to penalize behavior.

Prior to announcing its decision, ASF failed to consult with the regional supervisory Group – a clear breach of a key provision in the Solvency II Directive.

That was by no means the only breach of the requirements set out in Solvency II. The requirement that “supervisory authorities — conduct their tasks in a transparent and accountable manner with due respect for the protection of confidential information” was repeatedly breached.

A striking example of the willingness of ASF  to operate outside the norms established by Solvency II arose on 5th April this year when a meeting of the College of Supervisors established by Solvency II was held.  The report commissioned by EIOPA on Euroins Romania was scheduled for discussion at the meeting.

At the outset of the meeting, EIG requested sight of the report. The request was refused by EIOPA on the basis that the contents of the report were confidential. To protect confidentiality, copies of the report were made available only to the Bulgarian and Romanian regulators.

Within minutes of the closed-door meeting of the College of Supervisors concluding on 5th April, selected details of the confidential EIOPA report appeared on a Romanian website. Within hours, an ASF director publicly commented on details of the ‘confidential report’ which he claimed supported the actions taken by ASF.

These developments prompted Eurohold to write to EIOPA, EU Commissioners McGuinness and Dombrovskis, the ERBD, ESMA, and the Chair of Parliament’s ECON Committee protesting the manner in which the company has been treated. It is not clear what if any responses have been forthcoming.

Concerns about the actions of ASF have also prompted a number of MEPs to lodge parliamentary questions in the European Parliaments. The responses to the PQs are still awaited.

“MEP asks investigation over ‘takeover’ of Bulgarian insurer,” said EURACTIV in a statement on Twitter.

The EU Commission and EIOPA have been aware of the campaign that ASF has waged against Euroins Romania, EIG, and Eurohold Bulgaria AD for over two years. While the decision by ASF to effectively close down one of Romania’s largest providers of motor insurance on 17th March, a decision that impacts hundreds of thousands of Euroins Romania clients, may have taken both by surprise on the day, both were fully aware of the direction of travel in the months before the ‘axe fell’. Both demonstrated a curious reluctance to make any public intervention.

The failure of the Commission which has characterized Solvency II as establishing “a framework for the supervision of Europe’s insurance sector, underpinning the importance of a risk-based approach to assessing and mitigating risks,” with the“ objective of strengthening policyholder protection” is particularly mystifying.

Regrettably, that failure is part of a disconcerting pattern. There have been other examples of the Commission ignoring failures by Member States or state agencies to apply EU standards in recent times. Earlier this month, the Financial Times reported, with the headline  “Policing of EU Market drops under von der Leyen’s Commission”, that EU Commission action against internal market infringements had fallen by 80% between 2020 and 2022, placing the single market project “at risk”.

The extraordinary behavior of ASF in the case of Euroins Romania puts the suggestion that Solvency II sets the “gold standard of insurance regulation” in question. Maintaining that ‘gold standard’ requires a high level of trust and cooperation amongst national supervisory agencies. At a minimum, it requires that national agencies operate in good faith. Given the questions that arise whether ASF operated in good faith in the case of Euroins Romania, it will be interesting to see the extent to which those reviewing Solvency II factor in the weaknesses exposed by the Euroins Romania case into their work.

Produced in association with Brussels Report