EIOPA: Secrecy, flawed analysis, and double standards

The NOVIS Insurance case highlights a troubling lack of transparency in the European Insurance and Occupational Pensions Authority (EIOPA) operations, raises questions about failures by the Authority to align with the principle of open decision-making in the EU, and poses a question as to how the accountability promised in the Regulation establishing EIOPA is to be ensured, writes Dick Roche. 

The NOVIS Insurance Company, a life insurance provider based in Bratislava, was established in 2013 and operates under the supervision of the National Bank of Slovakia (NBS)

In addition to its home market, NOVIS conducted a very significant proportion of its insurance business through cross–border sales in Austria, Czechia, Germany, and through freedom to provide services mainly in Hungary, Iceland, and Italy.

NOVIS, with a high level of cross-border activity, was an ideal target for EIOPA, which has been anxious to extend its powers in respect of cross-border insurance sales.

In July 2021, EIOPA issued a Recommendation that NBS take action against an “ undertaking – later identified as NOVOS - which pursues cross-border business in several countries,”  alleging the company was operating in breach of Solvency II requirements and that it should lose its licence.  

NBS resisted, vigorously defending its position, argued its approach was in compliance with principle-based Union law, and that it was taking “other steps” to achieve any necessary changes.

In November 2021, EIOPA declared NBS to be “non-compliant ” and required it to take the required supervisory actions. A further Recommendation issued on 16 May 2022, giving NBS 45 days to comply.  

EIOPA also asked the EU Commission to intervene. In September 2022, the Commission, without independently verifying the underlying facts, endorsed  EIOPA's position and issued a Formal Opinion requiring NBS to go further.

This intervention stood in contrast to the Commission’s approach when responding to multiple questions in the European Parliament, it argued for national supervisory autonomy, insisting that  “under EU Law national authorities are responsible for assessing the operation of insurers”.

On 1 June 2023, NBS capitulated, withdrew NOVIS’s life insurance authorisation, moved to initiate liquidation proceedings, and requested that the courts appoint a liquidator. NOVIS appealed to the Administrative Court challenging the legality of the NBS decision. The Commercial Court refused the request of NBS for liquidation until the Administrative Court decides on the legality of NBS’s licence decision.

EIOPA’s obsessive secrecy

Despite the EU treaty provisions requiring transparency, NOVIS was denied access to EIOPA documents relating to its case. NOVIS submitted a formal request for access under Regulation 1049/2001. EIOPA resisted citing the need to protect possible court actions, to protect audits/investigations, and to protect its own decision-making procedures.

NOVIS appealed, and the European Supervisory Authorities Board of Appeal found EIOPA’s blanket refusal unjustified and required EIOPA to make an amended decision. In response, EIOPA issued a heavily redacted copy of its Recommendation of 16 May 2022.

Demonstrating EIOPA’s determination to keep its actions secret and a blatant disregard for openness and transparency, 18 of the document’s 19 pages of text had significant redactions; over 80% of the text on 11 of those pages was fully redacted. The document, as released, was virtually useless. 

A non-redacted version of the Recommendation became available when NOVIS commenced legal actions via the European Court, two full years after it had issued.  

Fabricated data and flawed analysis

EIOPA’s Recommendation of 16 May 2022 provides an insight into EIOPA’s campaign against NOVIS, which may explain the reluctance to ‘share’ the document.

It shows that EIOPA’s case against EIOPA relied heavily on  an onsite inspection of NOVIS conducted between March 2020 and January 2021   by an investigation team brought together by NBS and EIOPA.

A report on this joint on-site inspection  was issued on 19^th October 2020 under the title 'Protocol on an on-site supervision carried out at the company NOVIS Insurance Company'.

The Protocol alleged a breach of the Minimum Capital Requirement (MCR).  This became the foundation of EIOPA’s Recommendation to NBS.

The European Commission, without any apparent review or analysis, bought into the position taken by EIOPA and issued the Formal Opinion that led to NBS removing NOVIS's operating license.

Two key assumptions built into the Protocol’s analysis of NOVIS, the presumed annual cancellation rate for insurance policies and the estimated future cost of servicing each insurance contract, warrant scrutiny.

Yearly future cancellation rates

Annual cancellation rates are an important indicator of an insurer's stability. Low cancellation rates suggest stability, a strong customer base, and positive risk management. High cancellation rates are a danger signal. In the first three years of ita operations in Italy, NOVIS experienced yearly cancellation rates of less than 5 per cent.  

The investigation ‘Protocol’ estimated that from year four onward, annual cancellation rates would exceed 20%, an extraordinarily high rate that was neither explained or justified but was labelled as market data allegedly provided by the Italian regulator, IVASS.

The impact of using the 20% cancellation rate is significant. Applying the rate to the NOVIS Italian portfolio, which stood at 22,200  policies as at the end of 2022, suggests it would decline to just 2,226 policies by 2032 – 10% of its original size.

Publicly available data from the Italian Association of Insurance Companies (ANIA) show that the market rate for cancellations circulate between 5 and 10 percent.

Using the market-based data from ANIA the NOVIS 2022 portfolio of 22,200 policies would be expected to stand at around 9,100 policies by 2032, over 40% of its original size, and more than four times the EIOPA projection.

EIOPA’s use of flawed cancellation rate data, whether arising from carelessness,  incompetence, or something more sinister, significantly undermines an important element of the analysis supporting its conclusions regarding the alleged breach of Minimum Capital Requirements by NOVIS.

Annual cost of servicing individual insurance contracts

A second questionable assumption in EIOPA’s analysis is the figures used to project future annual cost of servicing existing contracts.

EIOPA based its solvency calculations on an assumption that the annual future cost of servicing each NOVIS contract would be approximately €300.

This figure has its origins in the work of investigation team created by NBS and EIOPA. It was intended to test how sensitive the results might be to different scenarios. This being the case, there was no need to prove that these assumptions were realistic or legally well-founded. However in its Recommendation, EIOPA treated these assumptions as if they were realistic, which is very different from how they are initially presented and understood.

A 2021 benchmark study, Consistent Expenses in European Life Insurance, prepared by actuarial consultancy, Milliman, suggests €62 as the annual servicing figure. 

Using the €62 per policy figure, the cost of servicing the NOVIS 2022 portfolio of 43,896 policies works out as €2,271,552 in year 1. Applying the €300 per policy figure, the total cost is €13,651,656, a staggering €11 million difference for year 1 with similar huge differences result for every following year.

If the ANIA Italian market lapse rate assumptions are applied across the 43,896 policies in the 2022 NOVIS portfolio and assuming no new underwriting, the cumulative nominal difference in contract servicing costs over 20 years would be €100 million. Under a second scenario, where no policy lapses are built into the calculations, the nominal difference over 20 years rises to a staggering €200 million.

Whichever scenario is chosen, the projected difference between the ‘real world’ analysis based on Milliman average servicing costs and the EIOPA €300 per annum assumption is significant, again throwing the analysis on which EIOPA chose to instruct NBS to act against NOVIS into question.

Institutional accountability

The NOVIS affair raises pressing questions about EIOPA’s credibility.

EIOPA subjected NOVIS to a closed, opaque, and imbalanced process. It established and led the cooperation platform and used highly questionable data to assert a solvency crisis while failing to acknowledge or correct evident issues.

This is in outright contradiction of the basic principle of the Solvency II regime that everything used must be as realistic as possible, well documented and be neutral.

As the NOVIS Case developed, EIOPA controlled the flow of information and exhibited an extraordinary lack of transparency.  It denied NOVIS access to any documentation. Its dismissive response to the Board of Appeal decision demonstrated extraordinary arrogance and a willingness to undermine due process.

Overall, EIOPA created the assumptions that determined the outcome of the NOVIS case, shaped the actions of the EU Commission, and pressured the national regulator into triggering the revocation of NOVIS’s license without giving the company a meaningful opportunity to challenge the process.

Overall, the case does little to instil confidence in EIOPA.

The case also raises questions for the European Commission. The Commission endorsed EIOPA’s stance in the NOVIS without adequate scrutiny and has consistently shielded EIOPA from parliamentary accountability.

The Parliament has also been remiss. Responses to Parliamentary Questions on EIOPA, which would not be tolerated in national Parliaments, have gone unchallenged. There has been no effort in Parliament’s committees to hold EIOPA to account. Parliamentary hearings with the EIOPA Chairperson before Parliament are little more than poorly attended P.R. exercises where few, if any, probing questions are raised.

The NOVIS case reveals a systemic issue: an EU supervisory body asserting regulatory authority without the transparency or accountability required by EU treaties. The flawed analysis, double standards, and opaque processes the case exposes will, unless addressed, undermine confidence in EIOPA, and, by extension, in the wider Solvency II regulatory framework.

The case demands a re-evaluation of how EIOPA can be held accountable. Article 1 of the EIOPA Regulation provides that “EIOPA shall be accountable and act with integrity and shall ensure that all stakeholders are treated fairly”.  The problem is that the Article is not clear as to who ensures that accountability.

Dick Roche is a former Irish minister for EU affairs and former minister for the environment.

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