Solvency II applied to EU insurers and reinsurers from 1 January 2016.
Solvency II is a regulatory regime for the EU insurance industry. It uses a risk-based approach to establish harmonised EU-wide financial requirements, governance and risk management standards and rules on reporting and public disclosure.
Lloyd’s gained approval from the UK regulator, the Prudential Regulation Authority (PRA), in December 2015 to use an internal model to calculate Lloyd’s Solvency Capital Requirement (SCR) under Solvency II. It requires managing agents to calculate their syndicate SCRs using internal models as well.
Lloyd’s supports Solvency II’s overall approach and underlying principles, which are aligned with international insurance supervisory experience and promote financial stability and consumer protection within the EU insurance market.
Implementation has been costly, but the Lloyd’s market now has enhanced risk management frameworks in place, providing greater insight into risk. Capital models are more robust, enabling assessment across risk types. Risk management is embedded with capital setting and governance more effective and efficient.
What can we expect next?
The UK’s departure from the EU has created a new institutional and regulatory landscape which enables the government and financial services regulators to review the existing frameworks and adapt them to the specificities of the local market whilst maintaining the competitive position of the UK’s financial services industry.
In February 2021, HM Treasury held a Call for Evidence on the Review of Solvency II outlining the future approach the UK will take regarding the regime.
The government have committed to the fundamental principles of Solvency II and consider that the framework has worked well overall since its full implementation in 2016.
That said, the Review offers an opportunity to conduct the first comprehensive evaluation of the framework and consider the substantial operational evidence accumulated by regulators and firms to help develop constructive and workable adjustments.
Areas for consideration are the processes for changing and maintaining internal models, reporting requirements, third country branch prudential requirements, and climate change.