The Solvency II Framework Directive was adopted by the European Parliament on 22 April 2009 and was, subsequently, endorsed by the Council of Ministers on 5 May 2009. The implementation date for the Directive is 31 October 2012 and the new regime will come into force across the European Union on that date. CEIOPS have published advice on a number of the Level 2 Implementing Measures that are available on their website www.ceiops.org
HISTORY & BACKGROUND:
The 4-Level process outlined under the Lamfalussy Framework provides the grounding under which the Solvency II project is being conducted. During 2004 and 2005, the European Commission issued three waves of Calls for Advice to the Committee of European Insurance & Occupational Pensions Supervisors (CEIOPS), regarding different aspects of the new solvency system. Following completion of the consultation process, the Commission adopted the Solvency II Proposal in July 2007.
Solvency II is a risk based approach that aims to provide the basis for a more ‘root and branch’ review of the overall financial position of an insurance undertaking than was previously the case under Solvency I. It represents a new system of supervision that assesses the overall financial position of an insurance undertaking or group. The new supervisory system is concerned with, amongst other areas, highlighting the importance of holistic risk management (including market risk) and prudential standards. Solvency II also aims to reduce the possibility of both insurance undertaking failure and, in a wider sense, of disruption to the efficient operation of the insurance market.
INTRODUCTION:
Solvency II is based on a three pillar approach:
Pillar 1
Pillar 1 covers the quantitative requirements of Solvency II. Within this pillar there are two capital requirements - the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) – representing different levels of supervisory intervention. The SCR is a risk-based requirement and acts as the key solvency control level. Two methods for the calculation of the SCR have been set out: the European Standard Formula or firms’ own internal models. The SCR will cover all the quantifiable risks an insurer or reinsurer faces. Risk mitigation techniques are also a salient factor in relation to SCR calculations. The MCR, in comparison, is a lower requirement. A breach of the MCR triggers the ultimate supervisory intervention of the withdrawal of authorisation.
Pillar 2
Pillar 2 is concerned with qualitative requirements such as insurance undertakings’/groups’ risk management and control systems. Falling under Pillar 2 is the Own Risk and Solvency Assessment (ORSA). The ORSA is an insurance firm’s own assessment of its capital needs taking into account the specific risk profile and strategy of the firm. It analyses areas not fully reflected by the SCR. It also requires a multi-year projection of available capital and capital required. (Perceived deficiencies in the ORSA may result in additional capital requirements).
Pillar 3
Pillar 3 covers supervisory reporting and disclosure. Firms will need to disclose certain information publicly, which will bring in market discipline and aid in ensuring the stability of insurers and reinsurers. In addition, firms will be required to report a greater amount of information to their supervisors. The intention is to bring market discipline to bear on firms. Equally, supervisory authorities will be required to be transparent about the detail of their implementation of the Solvency II regime.
IMPLEMENTATION:
In August 2009 all life assurance, non-life insurance and reinsurance companies were asked by the Financial Regulator to provide details relating to the use of proposed internal models. A formal letter issued in August 2009 to all insurance and reinsurance companies. The letter included a request to complete a questionnaire in respect of their chosen approach. An overview of the responses received will be published and will be available to view or download on this website in the coming days. A comprehensive timeline for the implementation program is available from the CEIOPS website. The diagram below gives a simplified overview of that timeline.
