Solvency II: Restructuring the Insurance Sector (Part 2)

The Solvency Act is going to have major ramifications for the Insurance sector in the European Union in particular, and is being watched keenly by governments of other nations. In part 1, we had a brief look at the directives that this directive is looking at amending. The Solvency Directive is an impending measure to manage risk, protect rights of claimants and prevent any major loss in the vent of systemic failure. This directive aims at being an early intervention measure by implementing the Minimum Capital requirements by Insurance companies. We will also discuss the Solvency Capital requirement to be implemented in the event the supervisor finds the company in an almost miss situation.

Supervisors are expected to assess risk in proportion to the nature, scale and complexity of the risks inherent in the business of an insurance or reinsurance undertaking, regardless of the importance of the undertaking for the overall financial stability of the market. Supervisors are expected to carry out regular reviews and evaluations. Supervisory authorities should be able to take account of the effects on risk and asset management of voluntary codes of conduct and transparency complied with by the relevant institutions dealing in unregulated or alternative investment instruments.

Solvency Capital Requirement: The starting point for the adequacy of the quantitative requirements in the insurance sector is the Solvency Capital Requirement. Supervisory authorities should therefore have the power to impose a capital add-on to the Solvency Capital Requirement only under exceptional circumstances The Solvency Capital Requirement standard formula is intended to reflect the risk profile of most insurance and reinsurance undertakings. However, there may be some cases where the standardized approach does not adequately reflect the very specific risk profile of an undertaking.

Capital Add-on: The capital add-on should be retained for as long as the circumstances under which it was imposed are not remedied. In the event of significant deficiencies in the full or partial internal model or significant governance failures the supervisory authorities should ensure that the undertaking concerned makes every effort to remedy the deficiencies that led to the imposition of the capital add-on. However, where the standardised approach does not adequately reflect the very specific risk profile of an undertaking the capital add-on may remain over consecutive years.

Internal Model: All insurance and reinsurance undertakings should have, as an integrated part of their business strategy, a regular practice of assessing their overall solvency needs with a view to their specific risk profile (own-risk and solvency assessment). That assessment neither requires the development of an internal model nor serves to calculate a capital requirement different from the Solvency Capital Requirement or the Minimum Capital Requirement. The results of each assessment should be reported to the supervisory authority as part of the information to be provided for supervisory purposes.