what is solvency ii

7/29/2019 What is Solvency II

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What is Solvency II?


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What is Solvency II?

SolvencyII...

...is a projectwhich was

initiated by theEuropean

Commission in

2001 ...establishescapital

requirements andrisk managementstandards that willapply across the

EU

...affects all areasof an insurers

operations

...aims to moveaway from theidea that one

approach fits all

...encouragescompanies to

manage risk in away which is

appropriate to thesize and nature of

their business

...aims to provideprotection to

policyholders byreducing the riskof insolvency to

insurers

...will come intoeffect at the end of

2012

Origin

Target

Scope

ComparisonConsequence

Timing

Aim


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Some feedback from market players


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What is changing?

Solvency II

Replaces Solvency I acrossEurope: promises a (more) levelplaying field

Encourages and rewardscompanies for managing risks

Requires insurers to look at theirrisks more closely

Requires a completely different setof financial information for reporting

Requires increased integration ofsystems and processes, includingIT systems

Requires detailed documentation

Allows for application of internal risk

models for capital calculations

Current Future

Solvency II will bring changes across all of an insurers operations.

Solvency I

Uneven playing field

Punishes prudent behaviour

One size fits all rather than riskbased approach to solvency capitalrequirements (e.g.4% technicalprovisions and 0,75% capital atrisk)

Limited reporting requirements

Many different requirements fordifferent countries


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Why are capital requirements important?

To reduce the risk that an insurer would be unable to meet claims.

To reduce the losses suffered by policyholders in the event that a firm is unable to meet allclaims fully.

To provide supervisors early warning so that they can intervene promptly if capital falls

below the required level.

To promote confidence in the financial stability of the insurance sector.

Position European Commission

The objective of the Solvency II regulation is to ensure that insurance companies are financially

sound and able to cope with adverse events, to protect policyholders and the financial system in

general.

A solvency capital requirement has the following purposes:


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Solvency II Structure


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Insurance Risk

Market Risk

Credit Risk

Liquidity Risk

Operational Risk

Solvency II is based on three guiding principles which cut across market, credit, liquidity,

operational and insurance risk.

The new system is intended to offer insurance organisations incentives to better measure and manage their risk

situation - i.e. lower capital requirements, lower pricing etc.

The new solvency system will include both quantitative and qualitative aspects of risk, each pillar focusing on a

different regulatory component; minimum capital requirements, risk measurement and management and

disclosure.

How is Solvency II structured?Solvency II is based on 3 pillars

Quantification

SOLVENCY II

Pillar 1

QuantitativeRequirements

Minimum capital

Requirement

Solvency Capital

Requirement (SCR)

Technical Provisions

Investment Rules

Own funds

Pillar 2

QualitativeRequirements &

Ruleson Supervision

Own Risk and

Solvency

Assessment (ORSA)

Capabilities and

powers of regulators,

areas of activity

Pillar 3

SupervisoryReporting and Public

Disclosure

Transparency

Disclosure

requirements

Competition related

Elements

Governance Disclosure


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Pillar 1 concerns the Solvency II balance sheet. It requires regulated

firms to calculate its capital requirement using either a standardformula or an internal model.

Solvency II foresees two levels of capital requirements:

Solvency Capital Requirements (SCR)

Level of capital to enable firm to absorb significant unforeseen losses

Gives reasonable assurance to policyholders and beneficiaries

Calibrated at 99.5% confidence over 1 year

Can use standard formula or own Internal Model

Minimum Capital Requirements (MCR)

Threshold that could trigger the ultimate supervisory action if breached

Unacceptable risk to policyholder

Consider expenses in run-off

Pillar I: Quantitative requirements

Pillar 1

QuantitativeRequirements

Minimum capital

Requirement

Solvency Capital

Requirement (SCR)

Technical Provisions

Investment Rules

Own funds

Quantification


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The Supervisory Authorities and General Rules:

supervisors shall be responsible for evaluating how insurance andreinsurance undertakings are assessing their capital adequacy

needs relative to their risks (i.e. the Supervisory Review Process, orSRP).

To perform this role, they are empowered to require remedial

actions when capital does not seem to be adequate.

The System of Governance: robust governance requirements being

a pre-requisite for an efficient solvency system, (re)insurance

company are requested to comply with the requirements on fit and

proper, risk management, the ORSA, internal control, internal audit,

the actuarial function and outsourcing.

In particular, the underlying objective of the ORSA is to ensure

they identify and assess all risks they are (or could be) exposed to;

they maintain sufficient capital to face these risks; and

they develop and better use risk management techniques in

monitoring and managing these risks.

Pillar II: Qualitative Requirements & Rules on Supervision

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2

Pillar 2

QualitativeRequirements &

Ruleson Supervision

Own Risk and

Solvency

Assessment (ORSA)

Capabilities and

powers of regulators,

areas of activity

Governance


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Pillar II requires firms to have effective processes in place to measure and manage risk. The

supervisory review ensures that these processes are adequate and that firms meet capitalrequirements.

Supervisory Review Process

Firm has considered all material risks

Appropriate risk management systems and controls are in place

Appropriate risk mitigation policies are in place and are effective

Capital add-ons could be imposed

Governance

Written policies on risk management, internal control and internal audit

Establishment of permanent and effective internal audit, internal control and actuarial functions

Clear lines of responsibility and reporting of information reviewed annually

Risk management system of strategies, processes and reporting procedures

Risk management

Firms should have in place an effective, integrated risk management system

The process needs to be owned by the Board

Firms will need to produce their ORSA

Companies will need to have their own view of the capital they need to meet their goals and hencethey will need to define their risk appetite and put in place consistent risk policies

Pillar II: Qualitative Requirements & Rules on Supervision


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Pillar III: Supervisory Reporting and Public Disclosure

Pillar 3

SupervisoryReporting and

PublicDisclosure

Transparency

Disclosure

requirements

Competition related

Elements

ctivity

Disclosure

Pillar III deals with market transparency and discipline in the insurance

industry, ensuring that firms publish key information that is relevant tothe market.

Market transparency and discipline will be increased in order to provide a

better insight into the actual risk and return profile of an insurance

company.

Disclosure, market transparencies and market disciplines will include:

Solvency & Financial Condition Report

Extensive publishing duties

Risk-Management Processes

Scenario-Analysis

Reinsurance Processes

Push transparency towards corporate governance

Dialogue with IASB

Pillar 3 will aim to harmonise reporting to supervisors, including different

types of information a supervisor needs to perform its functions and

information normally not in public domain

A more consistent and open regulatory framework should make it easier

for companies to sell across different markets, promoting competition


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Pillar III: Public Disclosure and Supervisory Reporting

The Solvency and Financial Condition Report (SFCR) is an annual report in which firms disclose informationrelating to their solvency and financial condition. The SFCR covers: Business overview and performance - description of the business, objectives and strategies and performance. Governance structure. Solvency valuation basis . Risk and capital management processes - description of the strategy to identify, manage, mitigate and control

each risk, level of available capital, capital requirements (possibly broken down by each component, i.e. MCR,

SCR and capital add-ons) This is still being discussed.

The amount and explanation of any breach in the MCR and SCR during the year. Qualitative description of the internal model.

The Report to Supervisor (RTS) is basically the outcome of the ORSA process. It includes all informationnecessary on a regular basis for the purposes of supervision.

Compared to the SFCR, the information in the RTS will be more detailed.

The RTS contains confidential information that is not disclosed in the SFCR.

All insurers must disclose a complete qualitative RTS in 2013. In subsequent years, only substantivechanges are reported.

The supervisor may designate certain insurers, based on their risk profile, to supply a complete qualitative RTS

annually.

Core information" disclosed in Quantitative Reporting Templates (such as MCR and SCR) must be reported

quarterly and other information annually.

Public Disclosure

Supervisory Reporting

what is solvency ii

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