The Solvency II regime offers incentives, potentially in the form of reduced capital requirements, to implement appropriate risk management systems and sound internal controls. As in Basel II for Banking, the regime has a three pillar structure, with each pillar governing a different aspect of the Solvency II requirements and approach: Quantitative requirements; Supervisor Review; and Market Discipline. As well as requiring firms to disclose their capital and risk frameworks, the Directive also asks firms to demonstrate how and where the requirements are embedded in their wider activities.
Forward planning for capital adequacy and risk management will become a part of any new strategic venture but the ‘embedding’ requirements as part of business as usual will also affect hedging and reinsurance strategies, product development and pricing, underwriting and investment management. Responding adequately to these new requirements will mean a major shift in thinking for many organisations – and a rigorous and planned approach to bridge the gap between standards now and those required for 2012.
Click on each of the pillars below to read the Solvency II requirements and approach in more detail.