Solvency II – Explained

What is Solvency II?

Solvency II, sometimes written as Solvency 2, is a fundamental review of the capital adequacy regime for the European insurance industry. The main aim is to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements prevalent in most European insurance markets and insurance companies. The remaining key dates for your Solvency II calendar are:

• Summer till end 2010: launch of European Commission (EC)’s fifth Quantitative Impact Study (QIS5).
• October 2012: Solvency II enters into force

One feature of the Solvency II directive is the use of its own technical terms and acronyms specific to the Solvency II initiative itself and the general insurance industry in general. Some of these are detailed below.

Application of Solvency II

Solvency II is now a mainstream issue for all EU insurance companies and these insurance and reinsurance companies now recognise that it will have a large impact on their governance and compliance processes right up to board level. In addition, there will be a significant impact on all IT and back office operations.

The Solvency II Directive will apply to all insurance and reinsurance firms with gross premium income exceeding €5 million or gross technical provisions in excess of €25 million. Principally, this initiative sets out to achieve the following two main aims:

• Solvency II will set out a new, strengthened EU-wide set of requirements on the capital adequacy and the risk management for insurers with the aim of increasing policyholder protection
• The Solvency II strengthened regime should reduce the possibility of consumer loss or market disruption in insurance.

Central elements:

The Solvency II proposals are based on a three pillar approach (similar to Basel II). The three Solvency II pillars cover:

Pillar 1 – Demonstrating adequate Financial Resources

This applies to all firms and considers the key quantitative requirements, including own funds, technical provisions and calculating Solvency II capital requirements. This is referred to as the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR). The SCR is to be calculated either through an approved full or partial internal model, or through the European standard formula approach.

Pillar 2 – Supervisory Review Process

The overall Solvency II process is conducted by the supervisory authority in reviewing insurance and reinsurance undertakings. This Solvency II review process is to ensure compliance with the requirements of the Directive and to identify where there are financial and/or organisational weaknesses susceptible to producing higher risks to policyholders. The system of governance should include an effective risk management system and prospective risk identification through the Own Risk and Solvency Assessment (ORSA).

Pillar 3 – Demonstrating an adequate System of Governance

The Solvency II initiative outlines the overall system of governance and the detailed disclosure requirements that are required. It is expected that the requirements to disclose information relating to the risk and capital levels of a company will bring about a better discipline through the overall market influence and influence of the regulators. The guidelines from the regulator outline that disclosure requirements should be timely, look to the future and are relevant.

JMR Consulting UK Ltd recognises the importance of collaboration and information sharing to ensure companies meet Solvency II targets. With this in mind we have set up a partnership with other Solvency II practitioners called Gain-Line that offers the support you need to implement the changes demanded by the Solvency II directive, on time and at an affordable price. Our Solvency II service helps you avoid the drawbacks of hiring a traditional consultancy or the headaches associated with trying to recruit and develop specialist expertise in house.

To find out more about how JMR Consulting UK Ltd and Gain-Line partnership working together can provide a safe pair of hands for your Solvency II programme, please get in touch by using the contact form, sending an email to info@jmruk.com or calling us on 0845 052 0900.