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 is more effective and efficient.
What can we expect next?
Solvency II legislation requires the EU Commission to carry out reviews of particular aspects of Solvency II in the coming years, to ensure it is working properly.
The first review ('2018 review') mostly looks at the standard formula used to calculate the Solvency Capital Requirement (SCR).
The European Commission asked EIOPA for advice on the 2018 review, which EIOPA provided, after consulting stakeholders.
The second review ('2020 review') is expected to allow for more fundamental changes.
Once the UK has left the EU it will not have to comply with Solvency II and could amend its insurance regulatory system to diverge from the EU's regime. However, UK insurers' and reinsurers' continued access to the EU single market could depend on the UK maintaining a degree of regulatory alignment.