Authored by: Synechron Business Consulting Group
Solvency II is an EU Directive aimed at protecting interests of policy holders and stability of the financial system by ensuring financial stability (solvency) of European (re)insurance companies. The rules stipulate the minimum amounts of financial resources that (re)insurers must have in order to cover the risks to which they are exposed.
- The Solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen events.
- Solvency margin requirements have been introduced in 1973.
- A limited reform was agreed by the European Parliament and the Council in 2002, which is known as Solvency I.
- Primarily focused on the prudential standards for insurers and did not include requirements for risk management and governance within firms.
Drivers behind Solvency II
Lack of risk sensitivity
- Several key risks, including market, credit and operational risk, are not properly captured. Risk measurements are not forward-looking and contain very few qualitative requirements.
- Ensure accurate and timely intervention by supervisors.
Scattered EU insurance market
- The present EU framework sets out minimum standards that can be supplemented by additional rules at national level.
- Differences on a national level result in increased costs for EU insurers and policy holders and hinder competition within the EU.
Sub-optimal supervision for groups
- Gaps in the way groups are managed and supervised.
- The current approach to the supervision of groups focused on legal entities, while in reality groups have become increasingly centralized.
Lack of convergence
- Lack of international and cross-sectoral convergence undermines the competitiveness of EU insurers.
- Lack of cross-sectoral consistency also increases the possibility of regulatory arbitrage.