Prudential rules and control of insurance companies

Prudential rules and control of insurance companies

Insurance companies - Rules Insurance companies, whether public companies or mutual societies, are subject to strict prudential rules. These rules aim to preserve the interests of the insured by guaranteeing that the organizations with which they are insured have sufficient funds to be able to compensate them in case of claims and, therefore, to be able to respect their commitments.

Prudential rules focus on social capital, solvency margin, technical provisions and regulated investments.

On the other hand, in order to ensure that these prudential rules are well respected by the insurance companies, the latter, to be issued an accreditation to be able to exercise, are subject to the supervision of supervisory authorities, including the Main is the Prudential Supervisory Authority (ACP), formerly called ACAM (insurance control authority and mutuals).
The prudential rules imposed by the legislation
Minimum share capital

The legislation, including the European Plan Solvency II, has imposed on insurance companies with a MCR (minimum capital requirement) or a "minimum capital requirement". Indeed, it is now essential to present a capital amount superior to a capital level below which the operations of an insurance company present an unacceptable risk for the insured.

The MCR is calculated a priori by a standard formula.
Solvency margin and guarantee fund

To ensure that insurance companies will be able to compensate the victims, the legislation has provided to impose standards in terms of financial guarantees. These standards include solvency margin and guarantee fund.

Solvency is the capacity, for a company, to respond to its financial deadlines and to ensure the future to relatively long term, respecting its commitments and without being in default. For insurance companies, the solvency is being able to be able to ensure the costs they face, and in particular compensate the insured victims of claims.

Starting from the previous definition, the solvency margin is a ratio to verify the solvency of insurance companies. It is calculated by dividing equity as well as unrealized gains, by the technical or mathematical provisions of the insurer.

A guarantee fund is a reserve of funds constituted by levy in the current account of an insurance company.

With regard to the solvency margin, the Insurance Code stipulates that "for the companies referred to in Article L. 310-2 [ie anonymous companies, mutual societies, Mutual societies, mutual unions or tontines], the minimum requirement of solvency margin is determined, in relation to the annual amount of premiums or contributions, or in relation to the annual average claims charge "(Article R334- 5 of the Insurance Code).

On the other hand, the legislation imposes insurance companies a minimum guarantee fund, regardless of the turnover of the company. This minimum guarantee fund must be at least 3 million euros, for viagers, RC and deposit risks, and at least 2 million euros, for other non-life risks . On the other hand, once this amount has respected, the guarantee fund must be greater than or equal to 1/3 of the regulatory amount of the solvency margin.
FINANCIAL INVESTMENT RULES

To keep its commitments vis-à-vis the insured persons, an insurance company is obliged to justify equity providing a margin of solvency, to constitute technical provisions (= amount of the debt to be expected vis-à-vis the insured) and to represent them by appropriate financial investments.

With respect to investments, insurance companies have 4 rules to be respected, namely the rules of:

1) Distribution: It is a question of respecting certain percentages, in the investment division admitted for the representation of the technical provisions, between equities, obligations and real estate investments. A total freedom is, however, left to insurance companies with respect to free assets (= assets not allowed for the representation of technical provisions).

2) Dispersion: In a given line of assets, the insurer may not hold more than certain percentages of a publicly traded company, a mandatory borrowing line, etc.

3) Congruence: The placement currency must correspond to the engagement currency (to avoid the insured the risk of foreign exchange).