The principle of proportionality : a critical analysis of its application in Solvency II with particular reference to the Maltese insurance and captive industry

Abstract

The study focuses on the principle of proportionality of Solvency II Directive with special reference to the Maltese Insurance and Captive industry. The research questions aim to provoke discussion into issues such as: How is the Solvency II Directive applied to small and medium (SME) insurance firms? How effective is the principle of proportionality? What concessions, if any, are given to SME insurers and Captives? The research tries to put light and provide contribution on how insurance undertakings can exercise and apply the principle of proportionality. The literature review contributes towards this aim through the collection of available literature. The primary research data analyses the principle of proportionality through interviews and discussions with the insurance industry and MFSA participants. The industry agreed that a cultural shift is needed. The risk-based approach of Solvency II introduced the element of proportionality. This new approach created different perspectives not only between regulator and regulated but also within different functions or employees of the same entity. This makes the principle of proportionality very subjective and thus open to interpretation and different perspectives. It also creates a greater need for open communication, which was found to be beneficial for both. Regulatory development is critical for regulatory sustainability and to reflect market developments. Regulatory convergence should also be a priority for EIOPA to reduce the potential for regulatory arbitrage. Proportionality is subjective and therefore the nature, scale and complexity of the undertaking are important factors in assessing whether proportionality is justified. This assessment should take a holistic, market view. The market would benefit from additional regulatory distinction between undertakings underwriting first party and third party risks, and favourable provisions in this respect need to be considered.