Law 20/2015, of 14 July, on the management, supervision and solvency of insurers and reinsurers
Law 20/2015, of 14 July, on the management, supervision and solvency of insurers and reinsurers (the "Law" or "Law 20/2015") was published yesterday in the Official State Gazette.
Although the new regulation shall enter into force on 1 January 2016, we deem it pertinent to provide you with information on the key amendments made thereto. The period between the publication of the Law and its entry into force is borne out of the law-maker's concern regarding the time which the affected entities shall have to align themselves to the amendments introduced thereby.
Thus, we have included a brief summary below of the new regime set forth by Law 20/2015, as well as the essential new elements which the different operators in the sector shall discover during the implementation thereof.
Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (known as and hereinafter referred to as "Solvency II" or the "Directive") was a complex legal project with regards to both the number of regulations on which it impacted and the time elapsed since its humble beginnings.
The impact of the approval of Solvency II on the insurance market lies in the fact that the Directive has significantly amended the financial supervision to which insurers are presently subjected.
The thinking behind this project arises from its equivalent in the banking sector, the Basle Agreement II. Basle II establishes the terms of a banking system equipped with sufficient capital provisions based on a more solid and sensitive system than Basle I with regards to market conditions.
Under the same purpose, although concerning a market and operators with significantly different characteristics to the banking sector, Solvency II has been created to strengthen the insurance market with regards to the solvency of insurers via the implementation of measures to improve the control and determination of the risks to which they are exposed.
In particular, Solvency II is based around three objectives: (i) to provide greater protection for insurers; (ii) for insurers to achieve greater efficiency in relation to their productivity and profitability; and lastly, (iii) to establish standards based on which greater transparency of the business developed by insurers shall be achieved.
Thus, the purpose of the Directive is to establish a legal framework to allow insurers to render their services throughout the domestic market. For such purpose, the Directive sets out general norms which, among others, include the following aspects relating to insurers' activity:
- access to direct insurance and reinsurance activities on their own account;
- supervision of insurance and reinsurance groups; and
- rescue and liquidation of direct insurance companies.
With regards to its transposition, a series of temporary measures to facilitate insurers' progressive adaptation to the new legal framework proposed by Solvency II were published in the Official State Gazette on 29 April 2014. All of said measures are included in Order ECC/730/2014.
Naturally, meeting the new requirements imposed by the different Spanish and European regulations related to the implementation of Solvency II compels insurers to face new challenges.
As established by Solvency II, the obligation to incorporate the Directive into the domestic law of each member state shall be limited to the provisions entailing a substantial amendment in comparison to previous Directives.
2. Law 20/2015
Significance and structure
The approval of Law 20/2015 entails the partial incorporation of Solvency II into our law, as well as Directive 2011/89/EU of the European Parliament and of the Council, of 16 December 2011, amending Directives 98/78/EC, 2002/67/EC, 2006/48/EC and 2009/138/EC, in relation to the additional supervision of financial entities forming part of a financial conglomerate.
As set forth in its preamble, this Law is a response to the requirement to incorporate the most recent European Community law into our legislation and thus adapt it to the new legal framework of the insurance sector. The purpose of the Law is to monitor and regulate private insurance and reinsurance activity, including the conditions of access and solvency and the rescue and liquidation regime of insurers and reinsurers. The objective of the foregoing is to protect the rights of policyholders, insured parties and beneficiaries, as well as to promote transparency standards and the correct performance of insurance activity.
Key updates with regards to the management, supervision and solvency of insurers and reinsurers
The significance of the changes brought about by the new Law justifies why they have not been introduced as a partial amendment of an existing law and hence why such law has been replaced by a new one. On the one hand, the new Law encompasses the provisions which shall remain in force and, on the other hand, it embodies those which are necessary to introduce given the development of the insurance market and the changes seen in the European regulation.
The preliminary Title sets forth the purpose and scope of application of the Law, as well as the applicable definitions for the purposes thereof.
Title I refers to the division of faculties between the State and Autonomous Communities, in turn setting out the duties corresponding to the General Administration of the State. With regards to equipping the General Directorate of Insurance and Pension Funds with more supervisory and regulatory powers, said entity shall hold the capacity to issue mandatory circulars with regards to the subject of the supervision of insurers and reinsurers.
Title II of the Law regulates the conditions which must be met for the obtaining of administrative authorisations as a pre-requisite for access to insurance or reinsurance activity. Such requirements are regulated under similar terms to those set forth in the current law, Royal Legislative Decree 6/2004, of 29 October, approving the restated text of the Law on the management and supervision of private insurance ("LOSSP").
The legal regime for mutual insurance societies, insurance cooperatives and mutual provident societies shall remain as is with regards to the related content in the LOSSP, pending the approval of a specific regulation on mutual societies and, in particular, the legal regime on dissolution, transformation, mergers, spin-offs and the general assignment of assets and liabilities.
With regards to the conditions for the performance of insurance and reinsurance activities contained in Title III, the Law sets forth the requirement for the effective governance of insurers. The inclusion of the foregoing highlights the recognition that some risks may only be suitably covered by corporate governance requirements and not only via quantitative requirements.
Title IV of the Law regulates the set of powers and faculties which allow the General Directorate of Insurance and Pension Funds, as the supervisory body of insurance in Spain, to watch over the performance of activity, including any outsourced functions or activities. The regulation regarding inspection has been especially reinforced. Chapter III (Monitoring of market behaviour) of this Title addresses the content of the supervisory faculties concerning insurers and reinsurers' market behaviour.
In the exercising of said supervisory faculties, inspections of such market practices may commence without prior notice or the requirement to identify the acting officers. Said officers may appear as users of the products offered in order to find out directly how such practices are being carried out in reality.
With regards to the content of Title V, it must be pointed out that, as opposed to the regulation contained within the LOSSP, Law 20/2015 imposes a more substantial form of supervision on groups of insurers and reinsurers. The possibility of creating groups which are not linked by capital - in particular, groups of mutual insurance societies - is a further update which should be highlighted.
In such cases, the supervision of groups shall include an assessment of their solvency as a group, the collection of risks and the intragroup transactions they execute. Both insurers and reinsurers belonging to such groups must have (also at individual level) an effective governance system in place, which shall also be subject to supervision.
Titles VI and VII of the Law regulate the mechanisms available to the General Directorate of Insurance and Pension Funds to deal with deteriorating financial situations of companies. Such mechanisms include special control measures and the procedures around the termination, dissolution and liquidation of such entities.
Lastly, Title VIII regulates the infringement regime and corresponding penalties.
Key updates with regards to insurance mediation
The Tenth Final Provision of Law 20/2015 partially amends the content of Law 26/2006, of 17 July, on private insurance and reinsurance mediation ("LMSRP"). Perhaps the most significant aspect of the amendment is the removal of the assistant adviser as had already been announced by the General Directorate of Insurance and Pension Funds.
Thus, among the varying amendments effective in the LMSRP by virtue of Law 20/2015, the amendment of article 8 thereof, regulating the now so-called "external collaborators" of insurance mediators, is of particular reference, as well as the rest of the amendments made to the LMSRP in accordance with such change.
In addition, with regards to the information which the mediators are obliged to provide to clients for the promotion, offer and subscription of insurance agreements, such information shall remain subject to guidelines. Said guidelines, concerning the requirements on accuracy and adequacy, shall be set by the Ministry of Economy and Competitiveness.
The wording of section two of article 28 of the LMSRP has been amended in an attempt to provide a greater definition of the grounds upon which, as the case may be, the General Directorate of Insurance and Pension Funds' opposition to the acquisition of a significant share in an insurer broker shall be based. As a consequence of said amendment, the party intending to acquire a significant share in an insurer broker must meet the requirements concerning commercial and professional repute under the terms defined by the LMSRP, without performing any of the prohibited acts listed therein.
Lastly, with regards to the objective analysis which the brokers must carry out, section four of article 42 of the LMSRP has been amended. Said amendment entails the removal of the assumption over when such analysis shall be deemed completed.
Entry into force
In general terms, this Law shall enter into force on 1 January 2016.
Nevertheless, the Thirteenth Temporary Provision (temporary regime of the amendments made to the Insurance Contract Act by way of the first final provision of the Law) and the Sixteenth Additional Provision (progressive introduction of the authorisations established by the Law and other measures for the adaptation to Solvency II) have entered into force on the present day.
Moreover, the Fourth Temporary Provision (temporary regime concerning the conditions for the performance of mutual provident societies which have not obtained administrative authorisation to extend their benefits) and Tenth Temporary Provision (scope of application of the special solvency regime) shall enter into force on 1 September 2015.
Lastly, the Ninth Final Provision (amendment of the Royal Legislative Decree 8/2004, of 29 October, approving the restated text of the Civil Liability and Insurance of the Traffic of Motor Vehicles) shall enter into force on 1 July 2016.
The approval of Law 20/2015 entails (in the absence of the regulatory development provided for thereby) the adaptation of the insurance sector to Solvency II, establishing a new solvency regime for the purpose of improving the corporate governance of insurers and reinsurers.
Thus, we shall have to wait to find out the content of the regulation developing the specific norms contained in Law 20/2015 in order to learn of the complete regulatory framework following the transposition of the Directive.