BACKGROUND
Solvency II is scheduled to come into effect on 1 January 2016 and will affect all insurers in the EU under the EU Directive that codifies and harmonises the EU insurance regulation with possible adoption by insurers in other regions subsequently.
Solvency II - BASEL FOR INSURANCEA comparison between Solvency II & Basel II's Pillars
| Solvency II | Basel II |
|---|---|
| Pillar 1-Qualitative requirements (capital requirements) | Pillar 1 (Minimum capital requirements) - Maintenance of regulatory capitals for 3 major bank risks (credit risk, operational risk and market risks) |
| Pillar 2-Requirements for the governance and risk management of insurers | Pillar 2 (Supervisory Reviews) - Framework to deal with residual risks and for banks to review their risk management systems |
| Pillar 3-Disclosure and transparency requirements | Pillar 3 (Market Disciplines) - Requirement to develop disclosure requirements allowing markets to gauge capital adequacies |
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SOLVENCY II - PILLAR I
Prior to Solvency II, Solvency I emphasizes capital requirements based on profit and loss.
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Solvency II's Pillar I introduces the requirement to set out qualitative and quantitative requirements for calculation of technical provisions (best estimates of liabilities + Risk Margins) and Solvency Capital Requirement (SCR).
Apart from SCR, insurers are also required to calculate a Minimum Capital Requirement (MCR). The SCR and MCR will behave as 2 levels of buffer with regulatory intervention coming in when capital level falls below the SCR and intensifies as it approaches the MCR.
Apart from SCR, insurers are also required to calculate a Minimum Capital Requirement (MCR). The SCR and MCR will behave as 2 levels of buffer with regulatory intervention coming in when capital level falls below the SCR and intensifies as it approaches the MCR.
SOLVENCY II - PILLAR II
Pillar II is the the key component of solvency II with the emphasize and requirements for Enterprise Risk Management and ORSA (Own Risk and Solvency Assessments). I will cover ORSA and Enterprise Risk Management for Insurers in a separate post addressing the challenges and appropriateness of ERMs in various markets.
SOLVENCY II - PILLAR III
Pillar III requires additional disclosure to the public and regulators is known as the bane among the pillars to most insurers as it requires the most preparations such expenditure and enhancements on systems not forgetting training of staffs.
Below are items required for public disclosure in the Solvency and Financial Condition Report (SFCR) by Pillar III:-
1.Internal Models (If applicable)
2. Business and Performance (Being Practiced)
3. Capital Management
4. Balance Sheet (Being Practiced)
5. Risk Management
6. System of Governance
1.Internal Models (If applicable)
2. Business and Performance (Being Practiced)
3. Capital Management
4. Balance Sheet (Being Practiced)
5. Risk Management
6. System of Governance
Apart from the above, Insurers are required to prepare a Report To Supervisors (RTS) report privately to respective regulators with the following info:-
1. Disclosure of Internal Models results
2. Future Plans & Initiatives
3. Explanation of Variances (If any)
4. Financial & Non-Financial Objectives
5. Legal and regularities requirements (If any)
6. Business and Risks Strategies
1. Disclosure of Internal Models results
2. Future Plans & Initiatives
3. Explanation of Variances (If any)
4. Financial & Non-Financial Objectives
5. Legal and regularities requirements (If any)
6. Business and Risks Strategies
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PART 2
I will cover ERM, ORSA, and various countries' existing capital management initiatives against Solvency II's requirements in Part 2.
