Circular NBB_2017_12 regarding local insurance undertakings

NBB_2017_12 – 27 March 2017 Circular – Page 1/8 Boulevard de Berlaimont 14 – BE-1000 Brussels tel. +32 2 221 38 12 – fax +32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be Circular Brussels, 27 March 2017 Reference: NBB_2017_12 your contact:
Bertrand Leton tel. +32 2 221 23 65 – fax +32 2 221 31 04 bertrand.leton@nbb.be Circular regarding local insurance undertakings Scope This circular concerns insurance undertakings referred to in Article 294 of the aforementioned Law of 13 March 2016, also known as local insurance undertakings. Summary/Objectives This circular explains the conditions required for a Belgian law insurance undertaking to benefit from the supervision regime for local insurance undertakings provided for by Articles 294 to 302 of the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings. It also comments on this supervision regime. Legal Reference Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings, Articles 294 to 302. Structure
I. Objectives
II. Definitions
III. Entry into force
IV. Supervision regime applicable to local insurance undertakings

Circular – Page 2/8 NBB_2017_12 – 27 March 2017 Madam, Sir,
I. Objectives
Article 4 of 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 (Solvency II) excludes from its scope insurance or reinsurance undertakings whose activity does not exceed certain thresholds nor includes certain operations. It is therefore up to national legislators to provide the supervision regime applicable to these undertakings.
In Belgium, the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings implemented this possibility by providing for three light supervision regimes:
1. a light regime for non-life and life insurance undertakings that meet certain size criteria and limitations on their activities,
2. an exemption regime for insurance undertakings that, in addition to size and activity limitation criteria, have concluded an agreement involving the full and systematic reinsurance of the insurance contracts they underwrite or the transfer of contractual commitments,
3. a light supervision regime for local insurance undertakings, i.e., those that limit their activities to covering certain non-life risks located in the municipality of their registered office or in neighboring Belgian municipalities.
This circular concerns the third category of undertaking. Its objective is to comment on:
1. the principles underlying the applicable regime,
2. the conditions allowing benefit from the light supervision regime,
3. the provisions regarding supervision,
4. the consequences of non-compliance with the conditions allowing benefit from the light regime.
II. Definitions
A. LEGAL AND REGULATORY TEXTS

• The Directive: 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 (Solvency II);
• The Law: the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings;
  In the absence of other clarifications in this circular, the terms have the meaning defined in the legal and regulatory acts referenced therein.
  III. Entry into force
  The legal provisions whose content is clarified by this circular have been applicable since 23 March 2016.

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IV. Supervision regime applicable to local insurance undertakings
Section 1. Overview
Articles 294 to 302 of the Law establish a light supervision in favor of local insurance undertakings. This regime concerns undertakings that strongly limit their activities, both regarding the risks covered and their geographical extent, and that cede a large part of them to a reinsurance undertaking. These undertakings must be registered with the Bank. The Law determines:

1. the conditions regarding the scale and nature as well as the geographical extent of the activity allowing benefit from the local insurance undertaking regime,
2. the information regarding the registration application that undertakings must submit in order to benefit from the local insurance undertaking regime,
3. the conditions regarding the maintenance of the regime,
4. the provisions regarding supervision.
   This section comments on each of these points and supplements them.
   Section 2. Undertakings concerned - Conditions
   Local insurance undertakings benefit from the regime specific to them if they meet the following conditions:
   2.1. GEOGRAPHICAL LIMIT (ART. 294)
   The activity is limited to the municipality of the registered office of the local insurance undertaking and to neighboring Belgian municipalities.
   This limit refers to the location of each insured asset. Thus, it is not authorized to cover a building located in a municipality other than those described above on the grounds that the registered office of the undertaking owning this building is located in the same municipality as that where the local insurance undertaking has its registered office.
   2.2. LEGAL FORM (ART. 298, 1°)
   Local insurance undertakings are constituted in the form of an mutual insurance association or a cooperative society.
   2.3. EFFECTIVE MANAGEMENT (ART. 298, 2°)
   The only governance constraint is to have put in place an effective management of at least two persons. These persons act jointly, i.e., they take together all decisions falling within the competence of the effective management. However, it is not required that these persons exercise their mandate full-time in the local insurance undertaking.
   Article 40, § 1, paragraph 2 of the Law applies to them, meaning they must "permanently possess the necessary professional integrity and adequate expertise to exercise their function." This fit and proper character is assessed based on the complexity of the structure and activities of the undertaking.

Circular – Page 4/8 NBB_2017_12 – 27 March 2017 The aforementioned persons must also fall under one of the cases of incompatibility provided for in Article 20 of the Law of 25 April 2014 on the status and supervision of credit institutions.
2.4. INSURED ASSETS (ART. 298, 3°, A)
In addition to being located in the municipality of the undertaking's registered office or in a neighboring municipality, the insured assets must be qualified as simple risks within the meaning of Belgian regulation (Article 5 of the Royal Decree of 24 December 1992 implementing the Law of 25 June 1992 on the terrestrial insurance contract). For information, these are, on the one hand, assets whose value did not exceed 1,477,445 EUR on 1 November 2014 and, on the other hand, certain assets (offices, agricultural holdings, schools, sports facilities, care establishments...), whose value did not exceed 47,524,494 EUR on 1 November 2014.
2.5. RISKS COVERED (ART. 298, 3°, B)
The risks covered must fall under the following branches:

• branch 8: Fire and natural elements, including natural disasters),
• branch 9: Other damage to property, including that caused by hail, frost, or theft, when not included in branch 8,
• branch 16: Various pecuniary losses, in particular but not exclusively, business interruption losses or loss of rent resulting from one of the risks of branches 8 or 9.
  They may also fall under the following branches to the extent that these risks are accessory (within the meaning of Article 21 of the Law) to those mentioned above:
• branch 1: Accidents, i.e., compensation for bodily damage suffered during incidents in branches 8, 9, and 16;
• branch 3: Land vehicles, in particular the coverage of vehicles parked in dwellings covered against fire and natural disasters;
• branch 13: General civil liability: in particular that of the tenant and that of the owner;
• branch 17: Legal protection;
• branch 18: Assistance, in particular, services provided by the insurer in the event of incidents in branches 8, 9, and 16.
  2.6. OTHER ACTIVITIES (ART. 298, 3°, C)
  As is standard for insurance undertakings, local insurance undertakings must limit their activities to insurance and activities deriving from it, in particular financial operations related to the management of their assets.
  2.7. PREMIUM COLLECTION (ART. 298, 3°, D)
  The annual premium collection of local insurance undertakings for insurance operations strictly speaking (points 2.4 and 2.5 above) may not exceed one million euros.
  This collection should be understood as gross of the intervention of reinsurance undertakings and securitization vehicles, which is equivalent to commercial premiums issued or the premium necessary to cover the risk (pure premium) increased by loading, expenses, and brokerage commissions, excluding taxes and contributions. This amount is indexed in accordance with Article 678 of the Law.
  2.8. REINSURANCE (ART. 298, 4°)
  To keep the risk at a low level, Article 298, 4° requires that local insurance undertakings reinsure on a large scale. The reinsurance rate must be at least 90% for risks of branches 1, 3, 8, 9, 16, 17, and 18. In other words, the undertakings themselves bear a maximum of 10% of the claim burden. Reinsurance must be total (rate of 100%) for liability coverage (branch 13) and natural disasters. It goes without saying that the reinsurance contract must be concluded with a reinsurance undertaking authorized in Belgium or in another State of the European Economic Area and authorized to exercise a reinsurance activity in Belgium via a branch or through the free provision of services.
  2.9. EXERCISING THE ACTIVITY BEFORE 1 JANUARY 2016
  Only insurance undertakings that were exercising their activities respecting the conditions within the limits provided for in points 2.4 to 2.7 and that were reinsured in accordance with point 2.8 above before 1 January 2016 can claim to benefit from the local insurance undertaking regime. It is therefore not possible to create new undertakings benefiting from the regime described under this section. Such undertakings can, however, benefit from the light regime referred to in Articles 272 to 293 of the Law, with the exception of Article 275, or the exemption provided for in Article 275 of the Law. These regimes are the subject of Circular NBB_2017_11. This also means that an undertaking that loses the benefit of the local insurance undertaking regime can no longer recover it subsequently.
  Section 3. Registration
  3.1. PRINCIPLE
  Until the entry into force of the Law, local insurance undertakings were covered by Article 2, § 1, quater of the Law of 9 July 1975 on the supervision of insurance undertakings and were exempt from all supervision. Henceforth, they can continue to exercise their activities benefiting from the regime provided for in Articles 294 et seq. of the Law only on condition of being registered with the Bank.
  3.2. CONDITIONS
  The registration application is accompanied by an administrative file, which will include the following information.
  3.2.1. General Information
• The undertaking provides, using the form included in the annex, the useful information concerning the person responsible for the authorization application (this person is the one who must sign the file) and concerning the contact person in charge of preparing the file.

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• The undertaking provides, using the form included in the annex, the useful information concerning itself. It attaches to the file its coordinated statutes, as well as, if applicable, draft statutes or draft amendments to the statutes.
  3.2.2. Scope of the Registration Application
• The undertaking indicates, using the form included in the annex, the branches on which the authorization application focuses and, if applicable, those for which the undertaking already benefits from an authorization. If applicable, it also indicates other than direct insurance activities that it exercises or intends to exercise. If these activities require specific authorizations, the undertaking will indicate the status of the procedure concerning these authorizations.
  The undertaking wishing to practice branch 17 (legal protection) indicates the claim management formula(s) as described in Article 4 of the Royal Decree of 12 October 1990 on legal protection insurance, accompanied by a description of how the selected formula(s) will be implemented and the means put in place for this purpose. The undertaking wishing to practice branch 18 (assistance) describes the direct and indirect personnel and material means available to meet its commitments.
• The undertaking briefly outlines its business project by describing the products it intends to market, the types of clients targeted, and the distribution channels it will use.
  3.2.3. Effective Managers
  By effective manager, within the meaning of this document, is meant any person who, under whatever name and in whatever capacity (director, manager, director, or otherwise), will participate in the day-to-day management of the undertaking. When the day-to-day management of the undertaking is delegated to a management committee, the members of the management committee are covered, first, and secondly, persons who are at a hierarchical level immediately below the management committee and who participate, due to the function they exercise, in the day-to-day management of the undertaking. Effective managers must possess the necessary professional integrity and adequate experience and are subject to certain prohibitions and incompatibilities (Article 298, 2° of the Law). Regarding the requirements for professional integrity and adequate experience and prohibitions, each effective manager must complete the form in the annex.
  3.2.4. Financial Aspects
  For the purpose of controlling compliance with the premium collection threshold provided for in Article 298, d) of the Law, the undertaking will provide:
• the annual accounts for the last three closed financial years;
• a forecast of the evolution of premium collection for the next three financial years.

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3.2.5. Declaration by the person responsible for the authorization application
The person responsible for the authorization application is asked to insert the following declaration at the end of the authorization file and sign it.
"I, the undersigned ………………………………………………….. (name and surname of the person responsible for the authorization application) certify the accuracy of the information provided in this authorization file, as well as in its annexes. I further acknowledge that the communication to the National Bank of Belgium of erroneous information may have a negative impact on its assessment of this authorization application or, subsequently, on the required qualities in my capacity to exercise a function as administrator or effective manager entrusted to me."
Section 4. Supervision
4.1. VERIFICATION OF COMPLIANCE WITH THE EXEMPTION
The main control exercised by the Bank on local insurance undertakings concerns compliance with the conditions allowing the retention of the benefit of the regime specific to these undertakings.
The Law does not organize systematic reporting regarding local insurance undertakings. Nevertheless, they are obligated to provide the Bank "on their own initiative, without delay, any element likely to lead to non-compliance with registration conditions" (Art. 299, § 1, para. 3). The elements referred to above may include, among others, non-compliance with the maxima referred to in Article 298 of the Law, the development of life insurance activity or non-life activity in an unauthorized branch, non-compliance with reinsurance thresholds, or non-compliance of the effective management. The Bank is empowered to request any information on an individual basis, allowing it to verify the registration conditions (art. 299, § 1, para. 2) and to conduct inspections at the premises of the concerned undertakings (art. 299, § 1, para. 4).
4.2. MERGER AND PORTFOLIO TRANSFER
The merger or transfer of a portfolio of an undertaking covered by this section is subject to the prior authorization of the Bank, Articles 102 (except § 1, 1°), 105, and 106 being applicable (art. 299, § 2).
Section 5. Non-compliance with the conditions of the exemption
In the event that an undertaking no longer complies with the conditions of the exemption or risks no longer complying with them over the next twelve months, the Bank sets a deadline for the undertaking to remedy this situation (art. 300, para. 1). The deadline will be proportional to the nature and seriousness of the breach observed. If the insurance undertaking has not remedied the situation within the set deadline, the Bank may take one or more of the measures provided for in Article 517, § 1, 1° to 7° of the Law (appoint a special commissioner, order the replacement of all or part of the members of the legal administration body and/or persons in charge of effective management, appoint an administrator or provisional manager, order the convening of a general meeting, temporarily suspend the exercise of all or part of the activity, order the transfer of shareholder rights, restrict or prohibit the free disposal of assets, order the transfer of all or part of the activity to another undertaking).

Circular – Page 8/8 NBB_2017_12 – 27 March 2017 If the irregularity is not remedied by the expiration of the deadline, the registration may be revoked. This revocation applies to all branches practiced, which automatically results in the entry into liquidation of the undertaking in accordance with Articles 183 et seq. of the Companies Code (art. 301, § 2, para. 2). In addition, the coercive sanctions and other coercive measures of Book IV (Articles 602 and 603) and the sanctions of Book V (Articles 604 to 609 of the Law) are applicable. A copy of this circular is transmitted to the authorized auditor(s) of your undertaking. Sincere regards, Jan Smets Governor
Annex: 1

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