Solvency II: a full comprehensive review preparing new rules and new technical requirements
Following the European Insurance and Occupational Pensions Authority’s (EIOPA) publication of the 2020 Solvency II review (the “Opinion”) in December 2020, the European Commission (EC) adopted a comprehensive review package of Solvency II rules on 22 September 2021. In addition to ensuring the regime is fit for purpose in the current economic environment and making the insurance sector more resilient, the review also aims “to ensure that insurers and reinsurers in the European Union (EU) keep investing and support the political priorities of the EU”.
The EC’s recommendations tackle the entire scope of the Solvency II Directive. In the current economic context, several quantitative reforms focus on long-term guaranteed measures; particularly, the extrapolation of the risk-free interest rates and the volatility adjustment are being reviewed. In parallel, as part of the proportionality principle, a new category of (re)insurers is defined as low-risk profile undertakings that benefit from an adapted framework.
New transparency requirements are also introduced around reporting and disclosures. These aim to improve the information needed by the respective recipients.
Language: English
Price (full seminar):
1 350 USD
This is a 6-week course. Each module will be delivered every week.
Scope: Insurance & Reinsurance (US, UK & EU); Legal & Comp. Dept; Finance; Audit
The Solvency II regulatory framework is built on a 3 pillars approach:
The Solvency II regulatory framework is built on a three-pillar structure on a risk-based approach that aims to enable a full assessment of the “overall solvency” of insurance and reinsurance undertakings through quantitative and quantitative measures:
Pillar 1: this pillar sets the qualitative requirements (asset liabilities valuation, capital requirements)
Pillar 2: this pillar sets the qualitative standards (governance, risk management, Own Risk and Solvency Assessment - ORSA)
Pillar 3: this pillar sets public disclosure and supervisory reporting
Another objective is to improve the quality of supervision and standardize the rules, especially regarding ongoing compliance with prudential rules, cross-border insurance businesses, and insurance groups. Finally, climate and systemic risk considerations are introduced to ensure these risks are better managed and supervised, mainly through long-term climate change scenario analysis. The 2020 Solvency II review has suffered delays due to the COVID-19 crisis, with stakeholders willing to ensure that related economic and financial observations are considered. Given the next steps required for negotiating the final legislative texts by the European Parliament and the Member States, transposition of the revised Directive into local law, and in parallel amendments to Delegated Acts, the revised Solvency II regime is not expected to enter into force before 2025.
Moreover, the EC proposes phasing-in more impactful measures to avoid disruptions and ensure a smooth transition. These new measures will significantly affect insurers and reinsurers, especially their solvency ratios, on their capitol charge and their own funds’ valuation. Undertakings should be prepared to review their strategy and calculation models, particularly those with long-term liabilities, and adapt their systems and internal processes to meet the new reporting and disclosure requirements. It is worth noting that these rules are still up for negotiation and may be changed. Undertakings should remain vigilant to developments and the final measures negotiated and ensure their implementation process is sufficiently flexible to handle potential changes.
Courses:
1. The 3 Pillars of Solvency II
2. Solvency II main features
3. Governance of Solvency II
4. Solvency II capital requirements
5. Solvency II market risk
6. Solvency II counterparty risk
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Training Guide
Insurance regulations in Europe are currently dominated by the EU jurisdiction-based regulatory framework known as Solvency II. The regulation consists of three pillars:
* quantitative requirements
* supervisory review
* market disclosure and reporting
Under Solvency II, Insurance companies must comply with minimum capital requirements.
Insurance companies have to choose between two different approaches:
* Standardized approach (SA)
* The Internal Model approach tailored to the specific company
The main goals are to reduce the risk for the insurer to fail and mitigate the risk that the policyholder incurs losses in the event of bankruptcy. It also sets new standards for better supervisory oversight to increase confidence in the insurance sector.
Governance is vital for the Solvency II regulatory framework. The primary goal of the Solvency II system is to enforce effective risk management through a risk-based capital requirement that is driven by the top management.
As a result, under Solvency II, governance will be more transparent and the organizational structure will be clearly documented.
Under Solvency II, insurance companies are required to hold enough capital to cover the “market-consistent” losses that could occur over the next year with a 99,5% confidence. As a result, insurance companies are mandated a Solvency capital requirement (SCR) and a minimum requirement (MCR).
The standard formula for market risk is a set of liabilities versus assets, and the solvency capital requirement (SCR) is computed, such as the difference between the current market value and the stressed value of assets and liabilities. EIOPA annual insurance statistics show that market risk accounts for between 25% and 70% of the SCR basis.
The counterparty default risk component of the Solvency II standard formula SCR covers three different sets of risk exposure:
* Receivables from intermediaries
* Risk-mitigating arrangements, contracts, and derivates or securities
* All kinds of credit exposures that aren’t covered in the market risk calculation
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