What is Solvency II?
Solvency II is one of the largest changes ever to insurance solvency regulation within the EU countries. The regulatory framework is consistent throughout all EU member states and applies to all EU insurance and reinsurance companies.
The basis for Solvency II solvency capital requirements is centered upon the type of risks that an insurance or reinsurance company is taking on. Solvency II is divided into three pillars and each pillar has consequences for an insurance company, either through additional capital requirements, additional administration or additional functions. The framework consequently adds some additional complexity to operating an insurance or reinsurance company that is currently not required.
Pillar 1 concerns quantitative solvency capital calculation models and sets a valuation standard for each risk type an insurance or reinsurance company is facing, both insurance and investment related risks. An insurance or reinsurance company can choose to either adopt the standard model formulas under pillar 1 or develop their own internal model.
However, the internal model requires supervisory approval. Under pillar 1 there are also stipulations on a Minimum Capital Requirement level (“MCR”) and a Solvency Capital Requirement level (“SCR”).
Pillar 2 covers companies’ qualitative measures handling and reducing risks and how risk management aspects are to be handled, e.g. via internal control functions. Pillar 2 also covers supervisory activities and reviews.
Pillar 3 covers reporting and the disclosure of information. Certain information is mandatory to disclose openly to the public and in addition an increased reporting of information to supervisory authorities is required.