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Press article: Solvency II in a nutshell

Tageblatt


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The new Solvency II European regulatory regime for insurance companies is fast approaching. Many articles have been written on this topic. Our purpose is to focus on its main outcomes and on how it will affect the insurance landscape throughout the European Union (EU).

In the same breath as Basel II for the banking industry, the European Commission (EC) has introduced a new regulatory framework for determining, managing, supervising and disclosing solvency requirements applicable to insurance and reinsurance undertakings in the European Union.

A draft framework directive was published on 10 July 2007 and approved by the EC on 22 April 2009called Directive 2009/138/CE (the Directive).

One of the aims of the new regime is to introduce economic and harmonised risk-based solvency requirements across EU members. Risk sensitivity is one of the failures of the existing Solvency I regime based on a rather arithmetic approach to estimating capital requirements.

The new regime imposes insurance undertakings to hold sufficient capital in order to cover a broader pallet of risks, including market, credit, operational and underwriting risks; all these risks are not considered under the current solvency regime.

In brief, the new rule should provide enhanced risk analysis and control, and thus result in improved protection to policyholders, as a consequence, one can aspire that positive implications will follow in terms of greater public confidence and improved market competition, even though this is an often discussed topic.

Solvency is designed on a ‘three-pillars’ basis which, in brief, covers:

  • Quantitative determination of capital requirement: the first pillar establishes a risk based standard model for calculating Solvency Capital Requirement (SCR) model, internal regulatory model or the recourse to both
  • Supervision: this second pillar covers the implementation of supervisory review by the relevant regulator, and its role in approving the calculation of the capital requirements, while ensuring compliance with the other features of the new regime, including prudential and sound corporate governance (need for internal audit, internal control, risk management and actuarial function)
  • Disclosure and market transparency: the objective of the third pillar is to ensure uniformity in the reporting practices to markets and supervisors. This includes the availability of increased information through the publication of annual and periodic reports

Since 2005, in parallel to the drafting and enacting of the Directive, Quantitative Impact Studies (QIS) have been carried by market participants under the supervision of the relevant authority to determine the impact of the proposed risk based model with the aim of improving its calibration. The results of this last exercise (QIS 5) are much awaited and should be published in April 2011.

Solvency II shall be effective from 1 January 2013 once implementing measures and coordination rules are agreed on.

That, however, was before a new draft Directive was recently put on the insurance industry’s radars. Called Omnibus II, its objective is, among others, to amend Solvency II and to introduce transitional measures with respect to its requirements, including the possibility to benefit from transition periods ranging from three to ten years.

The impact of such amendments is not clear yet: the actual transitional requirements and their duration will be determined in delegated acts which aren’t expected to be finalised before the end of 2011.

Contacts

Name:
Jérôme Lecoq
Company:
Deloitte Luxembourg
Job Title:
Partner - Audit
Phone:
+352 451 452 623
Email
jlecoq@deloitte.lu

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