Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency requirements.
The European Commission publishes the technical specifications for the fifth quantitative impact study (QIS5), see the FSA’s QIS5 page for further information.
The Insurance Sector Newsletters contain useful information for firms about the FSA’s approach to moving from ICAS to Solvency II.
The FSA publishes Delivering Solvency II – an update that summarises the key policy developments and implementation activities.
The Solvency II Directive is due to be implemented on 1 November 2012. Any changes to the go live date will be formally communicated by the European Commission, when the FSA will consider and communicate the potential impact on planning and preparations for itself and firms.
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 (please see Article 4 of the Directive for full details).
In a nutshell:
- Solvency II will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurers with the aim of increasing policyholder protection; and
- the strengthened regime should reduce the possibility of consumer loss or market disruption in insurance.
Central elements of the Solvency II regime include:
- Demonstrating adequate Financial Resources (Pillar 1): applies to all firms and considers key quantitative requirements, including own funds, technical provisions and calculating Solvency II capital requirements (the Solvency Capital Requirement -SCR, and Minimum Capital Requirement -MCR), with the SCR calculated either through an approved full or partial internal model, or through the European standard formula approach.
- Demonstrating an adequate System of Governance (Pillar 2): including effective risk management system and prospective risk identification through the Own Risk and Solvency Assessment (ORSA).
- Supervisory Review Process: the overall process conducted by the supervisory authority in reviewing insurance and reinsurance undertakings, ensuring compliance with the Directive requirements and identifying those with financial and/or organisational weaknesses susceptible to producing higher risks to policyholders.
- Public Disclosure and Regulatory Reporting Requirements (Pillar 3).
Solvency II is being created in accordance with the Lamfalussy four-level process:
- Level 1: framework principles: this involves developing a European legislative instrument that sets out essential framework principles, including implementing powers for detailed measures at Level 2.
- Level 2: implementing measures: this involves developing more detailed implementing measures (prepared by the Commission following advice from CEIOPS) that are needed to operationalise the Level 1 framework legislation
- Level 3: guidance: CEIOPS works on joint interpretation recommendations, consistent guidelines and common standards. CEIOPS also conducts peer reviews and compares regulatory practice to ensure consistent implementation and application.
- Level 4: enforcement: more vigorous enforcement action by the Commission is underpinned by enhanced cooperation between member states, regulators and the private sector.
The Level 1 Directive text was adopted by the European Parliament on 22 April 2009 and was endorsed by the Council of Ministers on 5 May 2009, thus concluding the legislative process for adoption. This was a key step in the creation of Solvency II. The Directive includes a ‘go live’ implementation date of 1 November 2012 for the new requirements, which will replace our current regime.
Delivering Solvency II:
In June 2010 we published Delivering Solvency II giving a summary of the key policy developments and implementation activities. The first issue includes: Completing the fifth QIS; Deciding to use an internal model; Reporting, disclosure and market discipline (Pillar 3); System of Governance; Getting involved in FSA forums; and Key contacts.
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