International perspectives on solvency modernisation: Europe

Region

Europe

New development

Solvency II

Scope of regulation

European Economic Area (EEA)

What's changing

Solvency II is the new proposed EU legislation which will govern the risk- and economic- based capital requirements of insurance companies operating in the EEA as well as define enterprise-wide risk management requirements. It replaces the current framework, Solvency I, which was introduced in the early seventies and defined capital requirements by specifying simple, factor-based solvency margins. While Solvency I capital margins were designed to act as a buffer to absorb potential risks and to protect policyholders, experience has shown that they do not always reflect the true risks in a given insurance portfolio.

The impact

Solvency II is the right approach because it combines (i) total balance sheet and economic-based solvency assessment, (ii) strong reliance on qualitative risk management requirements, and (iii) enhanced market discipline through increased disclosure requirements and transparency. This represents a paradigm shift in insurance supervision, the outcome of which should be insurance companies with a better understanding of the risks they take and regulatory incentives that promote state-of-the-art risk management and greater transparency.

Current status

The new regime has undergone five rounds of industry testing and technical standards are being finalised in preparation for 1 January 2013, the official implementation date of Solvency II.

Published 10 October 2011


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