Solvency II is a significant area of European regulatory reform with implications for insurers (both life and non-life).
- The proposed Solvency 2 regime represents the opportunity for Europe to take a global lead in the regulation of insurance.
- A regulatory focus on risk management will result in a better managed industry overall. This will benefit all stakeholders.
- Regulatory capital requirements will be based on the real risks that a company faces.
- The proposals for a sophisticated and risk based approach to supervision of insurance groups will, if carried through, encourage groups to develop their services to customers across Europe.
- Enhanced cooperation between regulators and movements towards supervisory harmonisation will encourage a true single market for insurance.
The Solvency 2 project is intended to replace outdated European insurance legislation with a consolidated set of requirements for supervision, capital, risk management and reporting.
The key elements are:
– Regulatory incentives are targeted at the effective management of risk. Managing risk to avoid problems is a much more effective regulatory strategy than simply holding enough capital to deal with problems when they occur.
– Capital requirements are assessed according to the risk profile of the company. Better risk management is reflected in lower capital; a virtuous circle is created of a better managed industry with lower costs. Consumers benefit from a more secure and efficient industry.
– The proposals include a high level of harmonisation across the community; these are key to enhancing the single market in insurance.
– The approach to groups is radically overhauled and they are supervised as groups instead of a collection of individual firms. This improves the effectiveness of supervision, helps transfer best practice and skills between supervisors and simplifies compliance.
– The EU is leading the way with insurance regulation under solvency 2. In an increasingly global market, European insurers remain a strong force. Solvency 2 proposals are important in helping Europe to maintain a competitive edge.
