Pillar 2 deals with the qualitative aspects of a company’s internal controls, risk management process and the approach to supervisory review. It encourages insurers to develop and implement a broad and robust internal risk management process that incorporates the management of policies, claims, provisions and risks. Pillar 2 stresses the importance of corporate governance and clearly defined roles and responsibilities for the executive team.

The supervisory approach relies on the two capital levels - Minimum Capital Requirements (MCR) and Solvency Capital Requirements (SCR) - to define the thresholds for supervisor intervention. If the available capital falls below the SCR the supervisory authority can intervene before capital levels fall below the MCR. Pillar 2 will make further allowances for risks that may not previously have been adequately quantified, such as group risk and strategic risk, by adjusting the SCR levels.

Increasingly, the nature of the supervision process will depend upon the risk profile of individual insurers and their approach to meeting Solvency II requirements. For example, if supervisors are dissatisfied with a company’s assessment of the risk-based capital they will have the power to impose higher capital requirements.

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