- This peer review assessed how National Competent Authorities (NCAs) supervise and determine the application of the key functions by the insurer with particular emphasis on proportionality
- In general NCAs apply the principle of proportionality
- Some weaknesses exist, leading to recommended actions to 18 NCAs in 8 different areas of supervisory approaches
- For the first time, the findings are published on a named basis
Today, the European Insurance and Occupational Pensions Authority (EIOPA) published the findings of its peer review assessing how National Competent Authorities (NCAs) supervise and determine whether an insurer's setting of key functions fulfils the legal requirements of Solvency II with a particular emphasis on proportionality.
The review examines practices regarding:
- combining key functions under one holder;
- combining key functions with administrative, management or supervisory body (AMSB) membership or with carrying out operational tasks;
- subordination of one key function under another key function;
- split of one key function among several holders;
- assessment of the fitness of key function holders; and
- outsourcing of key functions.
Key functions (risk management, actuarial, compliance and internal audit) are an essential part of a good system of governance under Solvency II, and, are expected to be operationally independent to ensure effective internal control. Given that the implementation of the governance requirements should reflect the natural scale of complexity of the risks run by the insurers, NCAs should apply the principle of proportionality in relation to the compliance with key function holder requirements.
The report includes findings from a comparative analysis of the key functions, identifies best practices and presents an overview of recommended actions addressed to the NCAs and EIOPA.
Overall, NCAs have adopted similar approaches in assessing how insurers manage key functions and applied the principle of proportionality in their assessment. Four best practices have been identified, providing guidance to NCAs for a more systematic approach regarding the principle of proportionality as well as for ensuring consistent and effective supervisory approaches.
The report also identifies some weaknesses, resulting in a number of recommended actions issued to NCAs. Some NCAs had not yet assessed key functions according to the Solvency II requirements. Other NCAs had weaknesses, in particular regarding the depth assessment and mitigating measures demanded from insurers for example in cases where combinations exist. The areas of recommended actions are linked with the supervisory approach of NCAs, the different combinations of key function holders including the internal audit function and AMSB membership as well as the fitness of the key function holders and outsourcing.
In line with the recently updated methodology, for the first time, the peer review findings are published in full and on a named basis.
As a result of this peer review, many NCAs have already undertaken actions to improve supervisory practices. These improvements will be taken into consideration in the follow-up to this review.
Gabriel Bernardino, Chairman of EIOPA, said: "The results of this peer review demonstrate the effective approach of national competent authorities in applying the principle of proportionality in their assessment of key functions. Through the implementation of the recommended actions consistent approaches among supervisory authorities will be further enhanced. I particularly welcome the increased transparency through the publication of the findings on a named basis. In being open about their activities, including where improvements can be made, the supervisory community is strengthening the foundations of supervisory convergence."
A shorter Executive Summary, the full report and the methodology applied in the conduct of the peer review can be obtained via EIOPA's Website.
Notes for Editors
The European Insurance and Occupational Pensions Authority (EIOPA) regularly conducts peer reviews of supervisory practices, working in close cooperation with National Competent Authorities (NCAs) to strengthen to strengthen supervisory convergence and the capacity of NCAs to conduct high-quality and effective supervision. Peer reviews are conducted, in the context of EIOPA's oversight work in close collaboration with NCAs and on the basis of EIOPA's Methodology for Conducting Peer Reviews. Representatives from NCAs are part of the peer review team.
The reference period for this peer review was 2016, but also covered supervisory practices executed prior to this in the preparatory stage of Solvency II.