## EXECUTIVE SUMMARY

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---

### Key findings: market size and structure
- The French insurance industry is the largest in the EU27 and therefore the largest in the European Union after Brexit.
- Number of insurers: 742.
  - 250 life and composite companies.
  - 381 non-life insurers.
  - 111 substituted mutual insurers.
- Change in total insurers: declined from 974 (2013) to 742 (2017).
- Market concentration:
  - Top 10 life and composite companies represent 67 percent of the share of total assets.
  - Bank-owned life insurers in the top 10 control 33 percent of life insurance assets (set to increase to 49 percent if the proposed takeover of CNP Assurances by La Banque Postale occurs).
  - Reinsurance concentration: 99.8 percent of reinsurance market assets concentrated in the top 10 entities; one group represents 49 percent of reinsurance assets.

### Distribution and product mix
- Bancassurance dominance:
  - Approximately 60 percent of life insurance premiums are distributed via bancassurance.
  - A cited figure shows 64 percent of the life market in 2017 via bancassurance.
- Life insurance trends:
  - Premiums relatively stable over 2015 to 2017 after growth from 2013.
  - Share of unit-linked business is increasing while participating business still dominates.
- Life insurers’ general account asset allocation at end-2017:
  - 31.5 percent in government bonds.
  - 31.2 percent in other bonds.
  - Geographic allocation: 60.2 percent of investments in France; approximately 4 percent in the United States.

### Capitalization and profitability
- Solvency II population and capitalization:
  - 339 insurers subject to Solvency II with less than EUR 1 billion in assets.
  - These small insurers exceed a 100 percent SCR even without transitional measures and the long-term guarantee package.
- SCR coverage:
  - Overall average SCR coverage ratio in the life insurance industry: 217 percent.
  - Only one life insurance company with assets between EUR 5 billion and EUR 10 billion would have an SCR coverage ratio below 100 percent without transitional measures (based on provided data).
- Profitability:
  - Life insurers have been able to make returns on assets that exceed guaranteed returns to policyholders on the general account on average.
  - Some small to medium non-life mutual insurance companies have not been able to make a positive return on equity.
  - Medium-size life and composite non-mutual insurance companies (EUR 5 billion to EUR 10 billion of assets) showed a negative return on equity in 2017 driven by two companies.

### Solvency II implementation and usage
- Implementation date: Solvency II implemented in France on January 1, 2016; Solvency I continues to apply to a very small part of the market.
- Market coverage under Solvency I as at end-2017:
  - 142 insurers out of 742 continue to be supervised according to Solvency I.
  - These insurers represent 0.03 percent of the assets of the insurance market and 0.17 percent of the premiums of the insurance market.
- Transitional measures usage and impacts:
  - Transitional Deduction on Technical Provisions (TTP):
    - Used by 17 solo insurance companies representing less than 10 percent of technical provisions.
    - Removing the TTP decreases the average SCR ratio for the French market as a whole by 10 percentage points.
    - For companies using the measure, SCR coverage ratio would decrease to 188 percent on average, a reduction of 31 percentage points.
  - Transitional on Risk Free Rate (TRFR):
    - Used by one solo insurer (negligible market share).
    - Removing the TRFR would reduce that insurer’s SCR coverage ratio by 36 percentage points to 168 percent.
    - TRFR may be applied only to contracts that give rise to an insurance liability before December 31, 2015.
  - Transitional measure on equity risk:
    - Used by 52 solo insurance companies and 8 groups.
    - Method: capital requirement based on a 22 percent shock in year 1, increasing linearly to the standard shock of 39 percent plus the symmetric adjustment (type 1 equities) or 49 percent plus the symmetric adjustment (type 2 equities) by January 2023 at the latest.
    - Applies only to equities acquired no later than January 1, 2016.
  - Transitional measure on own funds:
    - Used by 25 solo insurance companies and 11 groups (grandfathering of certain capital instruments issued before Solvency II).
  - Overall assessment: the French insurance industry is not significantly reliant on transitional measures to meet Solvency II requirements on an ongoing basis.
- Volatility Adjustment (VA) and Matching Adjustment (MA):
  - VA usage:
    - 175 French insurance companies out of 696 insurance companies in Europe use the VA.
    - These 175 companies represent more than 90 percent of the technical provisions in the French insurance industry.
    - 16 insurance companies apply both the VA and the TTP, representing 9 percent of technical provisions.
    - ACPR does not require prior approval for use of the VA.
    - VA calculation: 65 percent of the spread between the interest rate that could be earned from a reference portfolio of assets (after risk correction) and the risk-free interest rates; the reference portfolio is representative for the assets in which insurers have invested in the relevant currency.
    - Removing the VA would reduce the average SCR coverage ratio of the French insurance market from 238 percent to 228 percent; for insurers using the measure, reduce their average SCR coverage ratios from 216 percent to 202 percent.
  - MA usage: No French insurer applies the Matching Adjustment (MA).
  - Overall assessment: the French industry is not significantly reliant on the VA in normal times to meet the SCR coverage ratio of 100 percent, but the VA addresses balance sheet fluctuations in stressed market conditions.
- Use of internal models:
  - In France:
    - Two major (re)insurance groups use full internal models representing 17 percent of total French technical provisions.
    - Insurers representing a further 5 percent of total French technical provisions use partial models.
  - EEA-wide:
    - 2,912 (re)insurance companies applying Solvency II:
      - 81 use full internal models.
      - 105 use partial internal models.
      - 2,726 use the standard formula.
    - 363 (re)insurance groups supervised under Solvency II:
      - 8 use full internal models.
      - 33 use partial internal models.
      - 322 use the standard formula.
  - Observation: users of internal models tend to be large and complex insurers for whom the standard formula is less suited.

### Governance, reporting, and supervision observations
- Board independence and propriety:
  - Solvency II does not mandate a minimum number of independent Administrative Management or Supervisory Board (AMSB) members; international best practice suggests a minimum number of independent board members.
  - Recommendation: introduce a minimum number of independent AMSB members, at least one-third; ACPR could work with industry to promote independent Board members and target at least one-third independent representation before any EU change.
  - Greater supervisory focus is placed on executive board members and senior management than on non-executive board members.
  - Recommendation: increase supervisory attention to propriety of non-executive board members; ACPR’s proposed new procedures (annual self-assessment of propriety for non-executive AMSB members) are encouraged to be implemented.
- Reporting, data quality, and audit:
  - QRTs submitted to ACPR are not required to be audited; SFCRs disclosed to the public are not required to be audited.
  - Accountancy Europe (2016 survey) found 12 out of 13 countries surveyed have some audit requirements for Solvency II reporting, with France being the exception.
  - Mission finding: quality of data provided to ACPR under Solvency II could be improved.
  - Recommendations:
    - At least the annual QRTs (or a core subset) should be subject to audit requirements.
    - Audit assurance processes are recommended for systems and procedures used to complete QRTs and SFCRs.
- Supervision processes and on-site inspections:
  - ACPR requires QRTs and additional data (notably French GAAP) and weekly reporting of inflows/outflows for certain life insurers (accounting for 80 percent of the life insurance market).
  - Risk assessment process:
    - Each insurer undergoes a risk assessment at least annually recorded in a supervisory review process (SRP) tool.
    - Assessment uses automated quantitative analysis from QRTs and other reporting, expert judgement, and inputs such as EIOPA stress test results.
    - Both impact of failure and risk of failure are assessed and combined into an overall risk score.
    - Key risk indicators (KRIs) are calculated quarterly by an IT tool and presented to supervisors; supervisory intensity is determined according to the risk assessment, with room for judgement.
  - On-site inspection frequency (current general rules from ACPR):
    - Risk Rating 4 (highest): Every year
    - Risk Rating 3: Every 5 years
    - Risk Rating 2: Every 50 years
    - Risk Rating 1: No minimum frequency
  - Observations:
    - On-site inspections are intense and can last months but team members are not necessarily on-site for all that time.
    - Resource requirement for very intense on-site inspections appears greater than observed in other countries, reducing the number of insurers receiving on-site inspections annually.
    - Smaller and lower perceived risk insurers may receive less or no on-site attention with potential blind spots due to reliance on off-site analysis.
  - Recommendations:
    - ACPR should review the intensity and frequency of on-site supervision and its relationship to off-site supervision.
    - Review minimum frequency of on-site inspections for risk ratings 1 and 2 to create a definable difference between those risk ratings.
    - International benchmarking of supervisory intensity, particularly with insurance supervisors outside the EU, may be helpful.
- Issues with passporting and cross-border long-term non-life business:
  - France experienced difficulties obtaining claims payments from insurers licensed outside France offering long-term non-life insurance contracts (e.g., construction defects).
  - EIOPA’s Opinion on non-life cross border insurance business of a long-term nature (December 21, 2018) sets obligations for home NCAs and follows up with relevant NCAs six months after publication.
  - Recommendations:
    - ACPR and EIOPA should continue to work together to ensure home NCAs are informed of risks and cooperate to enhance supervision.
    - French authorities should coordinate with home NCAs of relevant insurers, particularly in Gibraltar, Denmark and Ireland, to ensure adequate provisioning and capital for long-term business.

### Macroprudential and liquidity considerations
- Liquidity features and risks:
  - 'Euro Funds' life insurance product is theoretically highly liquid but tax incentives require funds to remain with the life insurer for at least eight years to access tax benefits.
  - Policyholders can withdraw immediately or with a one- to two-day delay; only consequence may be loss of tax incentives. No surrender fees exist.
  - Bancassurance and branch models may exacerbate liquidity risk due to ties to banking groups and ease of withdrawal.
- ACPR monitoring and crisis powers:
  - ACPR requires weekly reporting of inflows and outflows from life and mixed insurance companies accounting for 80 percent of the life insurance market.
  - ACPR can order cessation of benefit payments from a particular life insurance company if necessary.
  - Haut Conseil de Stabilité Financière (under Sapin II law) can limit life insurance withdrawals in the event of a crisis for a maximum of six months; limits can apply to whole market or part of it and only in very exceptional conditions to prevent strong threats to the financial health of the whole insurance market or financial system.
- Gaps and recommendations on liquidity:
  - Liquidity risk is not explicitly named in the list of risks ORSA must address (Article 45 of the Solvency II Directive transposed into articles L 354-2 and R 354-2 of the Code des Assurances does not include liquidity risk explicitly).
  - Pillar I lapse risk module addresses capital implications of surrender behavior but not whether assets are sufficiently liquid to meet surrender demands.
  - Recommendations:
    - ACPR and EIOPA should move toward implementing additional reporting and improved monitoring of liquidity risk; ACPR encouraged to begin field testing requirements on a voluntary basis.
    - Introduce liquidity management requirements and liquidity stress tests at the conglomerate level, including insurance companies within financial conglomerates.
    - Require ORSA and SFCR to explicitly address liquidity risk in both quantitative and qualitative ways.

### Targeted recommendations (excerpt)
- Develop additional reporting on liquidity risk and begin field testing (Time: NT).
- Introduce liquidity management requirements and liquidity stress tests at conglomerate level (Time: MT).
- Require a minimum number of independent board directors at least one-third where legally possible (Time: NT).
- ACPR to review intensity and frequency of on-site supervision and its relationship to off-site supervision (Time: NT).
- Require audit of at least annual QRTs (or core subset) and audit assurance for systems/procedures for QRTs and SFCRs (Time: NT).
- Continue supervision to embed ORSA in insurer risk culture (Time: MT).
- Increase supervisory attention to propriety of non-executive board members and implement ACPR’s proposed new procedures (Time: MT).

---

*Source: EXECUTIVE SUMMARY, Technical Note on Insurance Supervision and Regulation, France, International Monetary Fund.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Key findings: market size and structure
- The French insurance industry is the largest in the EU27 and therefore the largest in the European Union after Brexit.
- There are 742 insurers in the insurance industry.
  - 250 life and composite companies.
  - 381 non-life insurers.
  - 111 substituted mutual insurers.
- At end-2017, total insurers declined from 974 (2013) to 742 (2017) with annual entries and exits as shown in Table 2.
- The top 10 life and composite companies represent 67 percent of the share of total assets; bank-owned life insurers in the top 10 control 33 percent of life insurance assets (set to increase to 49 percent if the proposed takeover of CNP Assurances by La Banque Postale occurs).
- The reinsurance sector is highly concentrated with 99.8 percent of reinsurance market assets concentrated in the top 10 entities and one group representing 49 percent of reinsurance assets.

### Distribution and product mix
- The bancassurance channel is dominant: approximately 60 percent of life insurance premiums are distributed via bancassurance; a cited figure shows 64 percent of the life market in 2017 via bancassurance.
- Life insurance premiums were relatively stable over 2015 to 2017 after growth from 2013; the share of unit-linked business is increasing while participating business still dominates.
- Life insurers’ general account asset allocation at end-2017:
  - 31.5 percent in government bonds.
  - 31.2 percent in other bonds.
  - Geographic allocation: 60.2 percent of investments in France; approximately 4 percent in the United States.

### Capitalization and profitability
- There are 339 insurers subject to Solvency II with less than EUR 1 billion in assets.
  - These small insurers appear well capitalized with all exceeding a 100 percent SCR even without transitional measures and the long-term guarantee package.
- Overall SCR coverage levels appear strong in the life insurance industry with an average SCR coverage ratio of 217 percent.
  - Only one life insurance company with assets between EUR 5 billion and EUR 10 billion would have an SCR coverage ratio below 100 percent without transitional measures (based on provided data).
- Life insurers have been able to make returns on assets that exceed guaranteed returns to policyholders on the general account on average.
- Some small to medium non-life mutual insurance companies have not been able to make a positive return on equity.
- Medium-size life and composite non-mutual insurance companies (EUR 5 billion to EUR 10 billion of assets) showed a negative return on equity in 2017 driven by two companies.

### Solvency II implementation and usage
- Solvency II was implemented in France on January 1, 2016; Solvency I continues to apply to a very small part of the market.
- Solvency II transitional measures were used by a small number of French insurers as at year-end 2018.
- French insurance companies are significant users of the Volatility Adjustment (VA): companies representing more than 90 percent of the technical provisions in the French insurance industry use the VA.
- The French market largely relies on the standard model to calculate the SCR; only two major (re)insurance groups use full internal models.
- A referenced EIOPA discussion paper (March 2019) indicates additional reporting on liquidity risk and improved monitoring of liquidity risk are under consideration at the European level for macroprudential purposes.

### Governance, reporting, and supervision observations
- Solvency II does not mandate a minimum number of independent Administrative Management or Supervisory Board (AMSB) members; international best practice suggests a minimum number of independent board members.
  - Recommendation: French authorities should advocate to relevant EU authorities to introduce a minimum number of independent AMSB members, at least one-third. ACPR could work with industry to promote independent Board members and target at least one-third independent representation before any EU change.
- Quantitative Reporting Templates (QRTs) submitted to ACPR are not required to be audited; Solvency and Financial Condition Reports (SFCRs) disclosed to the public are not required to be audited.
  - Recommendation: At least the annual QRTs (or a core subset) should be subject to audit requirements. Audit assurance processes are recommended for systems and procedures used to complete QRTs and SFCRs.
- ACPR should review the intensity and frequency of on-site supervision and its relationship to off-site supervision; more focused and regular on-site inspections could be envisaged.
- ACPR should continue supervision processes aimed at improving implementation of Own Risk and Solvency Assessment (ORSA) and embedding ORSA in insurer risk culture.
- The propriety of non-executive board members should receive increased supervisory attention; ACPR’s proposed new procedures are encouraged to be implemented.

### Macroprudential and liquidity considerations
- In line with EIOPA’s discussion paper, additional reporting on liquidity risk and improved monitoring should be developed and ACPR is encouraged to begin field testing such proposals on a voluntary basis.
- Given the prevalence of bancassurance models in France, development of a liquidity requirement for financial conglomerates should be considered.
- Introduce liquidity management requirements and liquidity stress tests at the conglomerate level carried out by supervised entities, including insurance companies within financial conglomerates.

### Targeted recommendations (excerpt from Table 1)
- In line with EIOPA’s discussion paper, develop additional reporting on liquidity risk and begin field testing (Time: NT).
- Introduce liquidity management requirements and liquidity stress tests at conglomerate level (Time: MT).
- Require a minimum number of independent board directors at least one-third where legally possible (Time: NT).
- ACPR to review intensity and frequency of on-site supervision and its relationship to off-site supervision (Time: NT).
- Require audit of at least annual QRTs (or core subset) and audit assurance for systems/procedures for QRTs and SFCRs (Time: NT).
- Continue supervision to embed ORSA in insurer risk culture (Time: MT).
- Increase supervisory attention to propriety of non-executive board members and implement ACPR’s proposed new procedures (Time: MT).

*Source: EXECUTIVE SUMMARY, Technical Note on Insurance Supervision and Regulation, France, International Monetary Fund.*

### 12. Implementation of Solvency II in France occurred on January 1,   2016 as in other EU

### 12. Implementation of Solvency II in France occurred on January 1,   2016 as in other EU

### Overview of Solvency II framework and French implementation
- Solvency II establishes a risk-based solvency framework with:
  - Pillar I: a risk-based solvency capital requirement calculated using a balance sheet with a market-consistent valuation of assets and a modified market-consistent valuation of liabilities.
  - Pillar II: qualitative requirements and a supervisory review process.
  - Pillar III: rules for supervisory reporting and public disclosure.
- The Euro Area FSAP finding: “The adoption of the Solvency II Directive has contributed to improved risk management practices and governance in the insurance sector but differences in national accounting rules, taxation and social security laws contribute to a continued fragmentation.”

### Market coverage and phased adoption
- As at end-2017:
  - 142 insurers out of 742 continue to be supervised according to Solvency I.
  - These insurers represent 0.03 percent of the assets of the insurance market and 0.17 percent of the premiums of the insurance market.
- ACPR facilitated implementation through participation in EIOPA QIS exercises and its own implementation exercises; industry representatives cited this as aiding a smooth implementation.

### Transitional measures and Long-Term Guarantee Package (usage and impacts)
- Transitional measures applicable to technical provisions can be applied for 16 years after introduction of Solvency II (beginning of 2016) and require ACPR approval.
- Transitional Deduction on Technical Provisions (TTP):
  - Used by 17 solo insurance companies.
  - These 17 companies represent less than 10 percent of technical provisions in the French market.
  - Removing the TTP decreases the average SCR ratio for the French market as a whole by 10 percentage points.
  - For insurance companies using the measure, the SCR coverage ratio would decrease to 188 percent on average, a reduction of 31 percentage points.
- Transitional on Risk Free Rate (TRFR):
  - Used by one solo insurer (negligible market share).
  - Removing the TRFR would reduce that insurer’s SCR coverage ratio by 36 percentage points to 168 percent.
  - TRFR may be applied only to contracts that give rise to an insurance liability before December 31, 2015.
- Transitional measure on equity risk:
  - Used by 52 solo insurance companies and 8 groups.
  - Method: capital requirement based on a 22 percent shock in year 1, increasing linearly to the standard shock of 39 percent plus the symmetric adjustment (type 1 equities) or 49 percent plus the symmetric adjustment (type 2 equities) by January 2023 at the latest.
  - Applies only to equities acquired no later than January 1, 2016.
- Transitional measure on own funds:
  - Used by 25 solo insurance companies and 11 groups.
  - Essentially grandfathering treatment of certain capital instruments issued before Solvency II took effect.
- Overall assessment: the French insurance industry is not significantly reliant on transitional measures to meet Solvency II requirements on an ongoing basis.

### Volatility Adjustment (VA) and Matching Adjustment (MA)
- VA usage:
  - 175 French insurance companies out of 696 insurance companies in Europe use the VA.
  - These 175 companies represent more than 90 percent of the technical provisions in the French insurance industry.
  - 16 insurance companies apply both the VA and the TTP, representing 9 percent of technical provisions.
  - ACPR does not require prior approval for use of the VA (though it may choose to require prior approval under Solvency II).
  - VA calculation: 65 percent of the spread between the interest rate that could be earned from a reference portfolio of assets (after risk correction) and the risk-free interest rates; the reference portfolio is representative for the assets in which insurers have invested in the relevant currency.
  - Removing the VA would:
    - Reduce the average SCR coverage ratio of the French insurance market from 238 percent to 228 percent.
    - For insurers using the measure, reduce their average SCR coverage ratios from 216 percent to 202 percent.
- MA usage:
  - No French insurer applies the Matching Adjustment (MA).
- Overall assessment: the French industry is not significantly reliant on the VA in normal times to meet the SCR coverage ratio of 100 percent, but the VA addresses balance sheet fluctuations in stressed market conditions.

### Use of internal models
- At company and group level in France:
  - Two major (re)insurance groups use full internal models representing 17 percent of total French technical provisions.
  - Insurers representing a further 5 percent of total French technical provisions use partial models.
- EEA-wide comparison:
  - 2,912 (re)insurance companies applying Solvency II:
    - 81 use full internal models.
    - 105 use partial internal models.
    - 2,726 use the standard formula.
  - 363 (re)insurance groups supervised under Solvency II:
    - 8 use full internal models.
    - 33 use partial internal models.
    - 322 use the standard formula.
- Observation: users of internal models tend to be large and complex insurers for whom the standard formula is less suited.

### Reporting, data quality, and audit recommendations
- QRTs submitted to ACPR are not required to be audited; there is no audit requirement for Solvency and Financial Condition Reports (SFCRs) disclosed to the public.
- Accountancy Europe (2016 survey) found 12 out of 13 countries surveyed have some audit requirements for Solvency II reporting, with France being the exception.
- Mission finding: quality of data provided to ACPR under Solvency II could be improved.
- Recommendations:
  - Strongly recommend audit requirements for QRTs and SFCRs to improve quality of reported data to ACPR and the public.
  - At minimum, annual QRTs should be subject to audit requirements; if auditing the entire suite of QRTs is too costly, at least core QRTs important for supervision and macroprudential surveillance should be audited.
  - Require audit assurance processes for the systems and procedures used to complete QRTs and SFCRs.

### Liquidity risk, monitoring, and crisis powers
- 'Euro Funds' life insurance product:
  - Theoretically highly liquid but subject to tax incentives that require funds to remain with the life insurer for at least eight years to access tax benefits.
  - Policyholders can withdraw immediately or with a one- to two-day delay; only consequence may be loss of tax incentives.
  - No surrender fees exist.
  - Bancassurance and branch models may exacerbate liquidity risk due to ties to banking groups and ease of withdrawal.
- ACPR monitoring and crisis powers:
  - ACPR requires weekly reporting of inflows and outflows from life and mixed insurance companies, accounting for 80 percent of the life insurance market.
  - ACPR can order cessation of benefit payments from a particular life insurance company if necessary.
  - Haut Conseil de Stabilité Financière (under Sapin II law) can limit life insurance withdrawals in the event of a crisis for a maximum of six months; limits can apply to whole market or part of it and only in very exceptional conditions to prevent strong threats to the financial health of the whole insurance market or financial system.
- Gaps and recommendations on liquidity:
  - Liquidity risk is not explicitly named in the list of risks ORSA must address (Article 45 of the Solvency II Directive transposed into articles L 354-2 and R 354-2 of the Code des Assurances does not include liquidity risk explicitly).
  - Pillar I lapse risk module addresses capital implications of surrender behavior (effect on net assets) but does not address whether assets are sufficiently liquid to meet surrender demands.
  - In the French context, heightened liquidity risk of life products means liquidity needs should be addressed explicitly, qualitatively and quantitatively.
  - EIOPA discussion paper (March 2019) on Systemic Risk and Macroprudential Policy in Insurance considers additional reporting and improved monitoring of liquidity risk for macroprudential purposes.
  - Recommendations:
    - ACPR and EIOPA should move toward implementing these proposals; ACPR encouraged to begin field testing requirements on a voluntary basis.
    - Introduce liquidity management requirements and liquidity stress tests at the conglomerate level, including insurance companies within financial conglomerates.
    - Require ORSA and SFCR to explicitly address liquidity risk in both quantitative and qualitative ways.

### Own Risk and Solvency Assessment (ORSA)
- Implementation status:
  - French insurers are at different stages of integrating ORSA into company risk culture.
  - Some companies still perceive ORSA as a compliance burden rather than a tool to improve risk management.
  - Several large insurers have internalized ORSA and find it useful.
- Recommendation:
  - ACPR should continue supervision processes aimed at improving ORSA implementation and embedding ORSA in insurance company risk culture.

### Governance and board independence
- Current practice:
  - Range of voluntary practices regarding appointment of independent board members; some insurers within Financial Conglomerates do not have independent board members.
  - Solvency II does not mandate independent AMSB members; ICPs also do not require this.
- Recommendation:
  - There should be a minimum number of independent members of the Board; international best practice suggests a minimum.
  - Ideally, amend Solvency II to require at least one-third independent AMSB members.
  - Interim action: ACPR could promote independent board membership in France with a target of at least one-third independence where legally possible.
- Propriety and fitness:
  - Greater supervisory focus is placed on executive board members and senior management than on non-executive board members.
  - Recommendation: increase supervisory attention to propriety of non-executive board members.
  - ACPR is moving toward an annual self-assessment of propriety for non-executive AMSB members which could be made available to ACPR on request.
  - Emphasis on assessing collective competence of the Board.

### Supervision processes, data intake, and on-site inspection frequency
- Reporting and monitoring:
  - ACPR requires QRTs and additional data (notably French GAAP) and weekly reporting of inflows/outflows for certain life insurers — providing comprehensive data for off-site analysis.
- Risk assessment and supervisory review:
  - Each insurer undergoes a risk assessment at least annually recorded in a supervisory review process (SRP) tool.
  - Assessment uses automated quantitative analysis from QRTs and other reporting, expert judgement, and inputs such as EIOPA stress test results.
  - Both impact of failure and risk of failure are assessed and combined into an overall risk score.
  - Key risk indicators (KRIs) are calculated quarterly by an IT tool and presented to supervisors; supervisory intensity is determined according to the risk assessment, with room for judgement.
- On-site inspection frequency (current general rules from ACPR):
  - Risk Rating 4 (highest): Every year
  - Risk Rating 3: Every 5 years
  - Risk Rating 2: Every 50 years
  - Risk Rating 1: No minimum frequency
- Recommendation:
  - ACPR should review minimum frequency of on-site inspections for risk ratings 1 and 2 to create a definable difference between those risk ratings.

*Source: IMF staff summary of chapter on implementation of Solvency II in France from the provided PDF content.*

### 33. On an annual basis an overall supervisory plan is determined across all entities and

### 1fraea2019006 - 33. On an annual basis an overall supervisory plan is determined across all entities and

### Supervisory planning and timing
- On an annual basis an overall supervisory plan is determined across all entities and approved by the General Secretary of ACPR within an overall framework determined by the College of ACPR.
- The plan takes into account individual supervisory plans and risk ratings as well as the availability of supervisory resources.
- The plan is determined in February each year.
- The plan can be subject to change if the operating environment for insurers changes or specific risks emerge for specific insurers.

### On-site inspections: intensity, duration, and logistics
- On-site inspections are intense and can last months but with team members not necessarily on-site for all that time.
- Insurance companies are required to provide dedicated space for on-site inspection teams for the period of the on-site inspection.

### Off-site analysis and required meetings
- Off-site analysis can also result in meetings with management of insurance companies and there are required meetings with some insurance companies. Examples are:
  - If one of the seven subjects of the qualitative risk analysis is scored 4 then there is a requirement for a dive-down meeting on that subject with management;
  - If the impact score of 2 or above is determined, then an annual meeting on the insurance company’s prudential situation is undertaken at year-end;
  - If an impact score of 4 is determined, then there is a meeting between ACPR’s management and insurer’s senior management in order to review all supervisory subjects and there is a meeting with the insurance company’s auditor; and
  - If the overall score is 3 or 4 then there are dedicated exchanges with the insurance company on its Solvency II reporting as well as a meeting with the senior management.

### Review of on-site supervision intensity and coverage
- ACPR should review the intensity and frequency of on-site supervision and its relationship to off-site supervision.
- Observations and concerns:
  - With a number of other meetings with insurance companies possible, some of these meetings may be close to what other supervisors would call focused on-site inspections.
  - There is a possibility that more focused and regular on-site inspections could be envisaged and then that would provide more flexibility in terms of the rules around frequency of on-site inspections mentioned above.
  - ACPR contends that the spectrum of supervision formats is deliberately broad based to adapt to different situations and the frequency of on-site inspections is adapted to risks.
  - The resource requirement for the very intense on-site inspections appears to be greater than observed in other countries.
  - It appears that the number of insurers receiving on-site inspections annually is reduced due to this intensity of on-site inspection leading to those insurers that are smaller and of lower perceived risk receiving less or no on-site supervisory attention.
  - The use of the word ‘perceived’ here is intentional in that risk assessments of these entities are focused on off-site analysis and risks may not be identified due to reliance on off-site analysis.
- Recommendation:
  - International benchmarking of supervisory intensity particularly with insurance supervisors outside the EU may be helpful.

### Issues with insurance companies passporting into the French market
- Under EU law, an insurance company licensed in an EEA Member State may provide its insurance services on the territory of another EEA Member State without permanent establishment. This is known as the freedom to provide services or “passporting”.
- France has experienced difficulties with obtaining claims payments from a number of insurers licensed outside of France offering long-term non-life insurance contracts, particularly construction defects insurance.
- This issue was addressed in EIOPA’s Opinion on non-life cross border insurance business of a long-term nature and its supervision issued on December 21, 2018.
  - The Opinion sets out obligations for home NCAs (National Competent Authorities) in terms of supervisory assessment, communication with host NCAs and actions home NCAs should take in the event of identified prudential issues.
  - EIOPA will follow up with relevant NCAs six months after the publication of the Opinion (so in June 2019). EIOPA will investigate the supervisory actions taken by the NCAs. This may result in further guidance.
- Recommendations:
  - ACPR and EIOPA should continue to work together to ensure that home NCAs are informed of the risks of the long-term non-life contracts in the French insurance market and work cooperatively with those NCAs to enhance the supervision of relevant insurers.
  - French authorities should coordinate with home NCAs of relevant insurers, particularly in Gibraltar, Denmark and Ireland to ensure that insurance companies established in their jurisdictions and conducting business in France are adequately provisioning for this business and have sufficient capital to support such long-term business.

*Source: 1fraea2019006 - 33. On an annual basis an overall supervisory plan is determined across all entities and*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1fraea2019006.pdf_