Background

Solvency II is a fundamental and wide-ranging reform of EU insurance supervision. It takes a risk-based approach, based on economic principles and seeks to ensure a high standard of risk assessment and efficient capital allocation. It therefore incorporates new capital requirements and risk management standards that will replace the existing regime for supervising EU insurers.

Currently, EU solvency margin requirements for insurers are set out in EU directives and have been in place since the 1970s. They underwent limited revision in 2002, a reform known as Solvency I.

The Solvency II programme is divided into three areas, described as “pillars”:
Pillar 1 Pillar 2 Pillar 3
Capital Requirements Supervisory Review Disclosure
Two thresholds:
- Solvency Capital Requirement (SCR)
- Minimum Capital Requirement (MCR)

SCR is calculated using either a standard formula or, with regulatory approval, an internal model.

MCR is calculated as a linear function of specified variables: it cannot fall below 25%, or exceed 45% of an insurer's SCR.

There are also harmonised standards for the valuation of assets and liabilities.		 The evaluation of adequacy of capital and risk management systems and processes. Insurers required to publish details of the risks facing them, capital adequacy and risk management.

Transparency and open information are intended to assist market forces in imposing greater discipline on the industry.

Solvency II includes proposals to streamline the supervision of insurance groups with subsidiaries in different EU member states. Such groups would be regulated by a "group supervisor", acting in co-operation with the supervisors in the territories where subsidiaries are based. Groups could benefit from recognition of group-wide risk diversification in the calculation of SCRs, although the precise details of group supervision are not yet agreed.
Last updated on 10 Nov 2009