The basics of Solvency II

Solvency II is an ambitious regulatory project in the European Union which could point the way forward for other regulators around the world. Approved by the European Union in March 2009, the new framework directive represents an important milestone on the way to a state-of-the-art insurance regulation system. As the financial crisis has shown, modern, economic and risk-based insurance regulations are the best way forward.

A new framework

The new regulations will promote an integrated, three pillar approach to risk management. All risks, that is to say insurance and financial market risks as well as risks associated with a company’s operating business and their dependencies, will be considered as part of the calculation for capital adequacy. Solvency II also has a qualitative aspect: it will create incentives for professional risk management by regulating the principles of internal risk management and of enhanced coordination among regulatory authorities. In addition, Solvency II promotes consideration of risk transparency. The new regulation also tackles the issue of asset and liability valuation on a market-consistent basis.

As a risk-based solvency regime, Solvency II encourages the use of internal models. Some countries - such as the UK and Switzerland (with the Swiss Solvency Test) - have anticipated this development and have already started to implement risk-based regulatory requirements similar to Solvency II.

Industry expectations

Swiss Re, along with the insurance industry, welcomes the shift towards an economic risk-based supervisory system: not only does the project aim to improve insurers’ risk management techniques, it is also expected to create a prudential framework that more accurately reflects the risks borne by (re)insurers. The project will have a significant impact on the industry’s key value drivers and particularly on capital requirements.

Implementation at Swiss Re

Swiss Re continuously works with clients, regulators, rating agencies and financial analysts to help implement appropriate capital models, reach meaningful disclosure levels and make more apparent the benefits of reinsurance business. Swiss Re participates in various industrial platforms, such as the Geneva Association, the Pan-European Insurance Forum, and the Chief Risk Officer Forum to reach joint industry positions in response to specific aspects of the Solvency II project and the challenges related to its implementation.

Published 18 March 2010