On 1 January 2016, the new supervisory framework for insurance and reinsurance companies – Solvency II - has become applicable.
Solvency II Timeline
Solvency II Preparatory Phase
Click here to see Solvency II Preparatory Phase.
What is Solvency II?
It is a harmonised, sound, robust and proportionate prudential supervisory regime to be applied across the European Union.
What is the difference between Solvency I and Solvency II?
Solvency II will replace Solvency I, which represents 13 EU Directives and foresees the existence of 28 national supervisory regimes. As of 1 January 2016, the 13 EU Directives will be replaced by Solvency II. Solvency II is one common regime to be applied by all 28 EU Member States.
Benefits of Solvency II at a Glance
|Several supervisory regimes differing from each other|
Single supervisory regime for the whole EU
Companies don’t need to closely look at several types of risks
Companies better understand and, thus, more efficiently mitigate the risks they face
Consumers always suffer the most if their company is affected by the economic reality
Robust risk management and governance means well protected consumers
Supervisors don’t have a full picture about the companies’ profiles’
Enhanced reporting allows supervisors to see the upcoming problems and to timely react
Solvency II in simple terms
Why is Solvency II needed?
Solvency II is a welcome modernisation of European solvency standards, many of which have not been updated since the 1970s. Solvency II is key for the insurance industry but equally for consumers. It is a harmonised and sound risk-based supervisory regime, transparent in its application, reporting and disclosure across the European Union.
Under Solvency I companies were not required to apply a robust risk management and governance management. Therefore national supervisors did not get the adequate information on risks and governance problems the insurance companies had, which became even more evident and highly relevant with the outbreak of the financial crisis.
What is Solvency II about?
The Solvency II supervisory regime consists of the three pillars:
Pillar I – Calculation of capital reserves
It outlines the standard formula insurance companies across the European Union have to use for the calculation of their capital reserves covering all types of risks.
Pillar II – Management of risks and governance
It contains the requirements for the management of potential risks and for governance.
Pillar III – Reporting and disclosure
It describes the information and reporting insurance companies across the European Union have to submit to the national supervisor and disclose publicly.
All the three pillars are equally important.
What problems does Solvency II aim to solve?
One feature of the financial crisis was an underestimation of risks. Solvency II requires insurers to measure risk, report it, and set aside appropriate capital.
It is a welcome modernisation of European solvency standards, many of which have not been updated since the 1970s.
Solvency II is an advanced supervisory regime, applicable in all European Union Member States. It is based on the latest international developments in risk-based supervision, actuarial science and risk management.
Why is Solvency II good for (re)insurance companies?
It incentivises companies to clearly identify and manage the risks they are facing.
Why is Solvency II good for consumers of insurance products?
Solvency II enhances protection of consumers of insurance products through introducing risk management and governance management, as well as by requiring a market-consistent valuation of insurers’ assets and liabilities. Consumers should be better protected and get the benefits of the insurance contracts they have signed. Proper management of risks and governance will enable insurance companies to keep the promises they made to their clients.
Why is Solvency II good for cross-border insurance groups?
It means less administrative burden for these insurance conglomerates that are present in several EU countries. They would need to report to one supervisory authority instead of reporting to each national supervisor in different countries.
Furthermore, Solvency II with harmonised and common supervisory requirements will enhance fair competition and create a level-playing field in the insurance market and will abolish competition advantages some cross-border groups had under Solvency I.
Why is Solvency II good for national supervisors?
Harmonised reporting and disclosure that was not required under the previous framework – Solvency I - will now provide supervisors with adequate information. As a result supervisors will have the possibility to timely act and their interventions can be better targeted.
Why is Solvency II good for the European Union?
A harmonised framework for insurance will be of benefit to both consumers and companies.
It will help to safeguard financial stability because the harmonised reporting and disclosure will allow supervisors to compare companies and by that to better and timely analyse the risks and vulnerabilities of the European (re)insurance market as a whole.
What role does EIOPA play in Solvency II?
EIOPA contributed to the development of the Solvency II regulatory framework by providing technical advice to the European Commission.
After Solvency II becomes applicable on 1 January 2016, EIOPA’s new role is to monitor and ensure the consistent and convergent application of Solvency II across the European Union.
EIOPA also provides certain key information notable the risk free interest rate used for measuring insurance undertakings’ liabilities.
Will Solvency II affect competitiveness of the EU companies towards the non-EU market players?
On the contrary: Solvency II has become a catalyst for the movement by different countries around the world (Mexico, China, Australia, Israel, etc) towards risk-based regulation and supervision.
Furthermore, Solvency II includes the so-called equivalence provisions regarding non-EU countries, which would be mutually beneficial to the European and third countries’ (re)insurers. In case the third country’s solvency and prudential regime is considered equivalent to Solvency II, the companies working in this country will be relieved from unnecessary duplication of regulation.
Decisions about equivalence are taken by the European Commission upon the recommendations and analysis provided by EIOPA.
Will Solvency II be reviewed?
Yes, as of 2016 EIOPA will start collecting evidence and experiences with the application of Solvency II, pending a review of the capital requirements in 2018. It will submit its advice to the European Commission in 2018.
EIOPA will make full use of the experience gained in the first two years of the Solvency II application and propose the introduction of further simplifications wherever deemed appropriate.
Separately EIOPA will provide an annual report to the European Council, Parliament and Commission on the implementation of the so-called long term guarantees package.