Solvency II Glossary

Solvency II uses a number of specific terms. This glossary is to help you understand Solvency II terminology.

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Calculation kernel

The central method for quantifying and modelling risk and capital requirements in the internal model.

European Commission

The executive arm of the EU, responsible for initiating new legislation and the day-to-day running of the EU. It has been responsible for drafting the Solvency II Framework Directive, shaping the implementation measures and evaluating its enforcement.

European Council

Made up of representatives from each of the EU’s member states. It provides the EU with political leadership and establishes the direction of European policy. The Council and the European Parliament are responsible for passing legislation, including the Solvency II Directive.

European Insurance and Occupational Pensions Authority (EIOPA)

The EU supervisory body for insurance. It was established in January 2011 as part of wider changes to the European financial services regulatory framework and replaces the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). EIOPA has greater legislative powers than CEIOPS and continues as the regulatory advisory body to the European Commission on Solvency II.

European Insurance and Pensions Committee (EIOPC)

An EU committee of experts from Member State finance ministries. The Committee scrutinise the implementing measures in order to develop the legal text that will operationalise Solvency II.

European Parliament

Made up of Members of the European Parliament (MEPs) elected directly by European citizens. The Parliament and the European Council are responsible for passing legislation, including the Solvency II Directive.

Gap analysis

An exercise undertaken by insurers to compare their existing risk and capital management processes against those required by Solvency II to identify and remedy potential gaps.

Individual Capital Adequacy Standards (ICAS)

The previous capital adequacy requirements regime applicable to UK insurers. The ICAS regime was replaced by Solvency II.

Internal model

A risk management system developed by an insurer to analyse their overall risk position, to quantify risks and to determine the capital required to meet those risks. Under Solvency II, an insurer may use its internal model to calculate its Solvency Capital Requirement, with the approval of its national supervisor.

Internal Model Approval Process (IMAP)

A process established by the Financial Services Authority to assist insurers seeking to use internal models to calculate regulatory capital requirements. Internal models must be reviewed and approved by the regulator before they can be used to calculate regulatory capital under Solvency II.

International Association of Insurance Supervisors (IAIS)

The global regulatory standard setting body for the insurance industry. It represents insurance regulators and supervisors of some 190 jurisdictions, issuing global insurance principles, standards and guidance papers.

Lamfalussy process

The process by which financial services legislation is introduced in the EU. It is designed to develop legislation more quickly and easily. It is a four level approach. Please see definitions of levels 1 to 4 in this glossary.

Level 1 Framework Directive

The Solvency II Framework Directive which contains the basic principles underpinning Solvency II.

Level 2 Implementing Measures

Detailed rules that allow Solvency II principles to be put into practice. The main impact of Solvency II on EU insurers is shaped by Level 2 implementing measures.

Level 3 Guidance

Supervisory standards, guidelines and recommendations to enhance convergent and effective application of Solvency II. Unlike levels 1 and 2 they are not mandatory for Member States.

Level 4 Enforcement

Post-implementation compliance with Solvency II provisions in national laws and regulations.

Lloyd's dry run process

A centrally-directed process, intended to ensure that managing agents are sufficiently well progressed in their Solvency II preparations and that they have considered how they will meet all of the requirements.

Lloyd's Internal Model (LIM)

The internal model Lloyd’s developed for Solvency II. Syndicate level internal models feed into the Lloyd’s Internal Model. Lloyd’s gained regulatory approval for a single internal model for the whole market.

Minimum Capital Requirement (MCR)

The lower of the two capital levels required by Solvency II. It represents the minimum level of capital required to be held by an insurer before ultimate regulatory intervention is triggered.

Omnibus II Directive

Legislation to amend the Solvency II Framework Directive, to bring it in line with the EU’s Lisbon Treaty and to take account of the EU’s new supervisory structure.