Key Points

Fast Facts on Solvency II

What is Solvency 2?

• The biggest ever exercise in bringing together insurers and reinsurers under one regulatory regime 
• In 2012, all EU/EEA countries will be united by a single set of rules governing what constitutes an acceptable level of insurer creditworthiness

Aims:

• To deepen integration insurance market
• To protect policyholders and beneficiaries
• To improve the international competitiveness
• To promote better regulation
• Overcome inadequacies of Solvency I

How:

• By harmonising Solvency II rules
• Aligning capital requirements to each company’s risk profile
• Emphasis on ERM
• Establishing an integrated risk-based approach to supervision

Key Features

• Principles based
• Risk based
• Entities calculate their own individual solvency capital requirement taking into account the risks they face
• Involves a cultural change to the way (re)insurers do business
• Prescribes changes in corporate governance, risk quantification and management, and financial reporting
• Capital requirements can be assessed using either an internal model or a standard formula
• Framework in place for supervision of insurance groups in each case by a ‘lead regulator’

The Regulatory Framework – 3 Pillars

Pillar 1:

• Sets minimum capital requirements
• Requires each firm to calculate its capital requirement using either a standard formula or an internal model

Pillar 2:

• Requires firms to assess and manage the risks to which they are exposed and to assess their own capital needs and maintain that capital
• The firm's assessment of its capital needs and of its risks is subject to supervisory review

Pillar 3:

• Requires regulated firms to disclose publicly, key information that is relevant to market participants
• Aims to enhance market discipline on the regulated firm

Key Messages

• Solvency II will bring changes to the UK regulatory requirements
• Insurers should be making effective implementation plans now 
• The Board and senior management are responsible for making it work
• Suggested actions for now:
  • Draw up an implementation plan for Solvency II
  • Complete QIS4 spreadsheets on a best efforts basis if not done already
  • Consider internal model versus standard formula

Timeline:

Further information:

Download Solvency II Brochure