Solvency Ii Compliance - What You Need To Know

By Author: MetricStream
Total Articles: 2
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Solvency II is the latest solvency framework that governs the quantitative capital adequacy requirements, qualitative supervisory activities - governance & risk management and supervisory reporting & public disclosure of information of insurance/re-insurance organizations in the European Union (EU). Scheduled to be implemented by January 1, 2013 - Solvency II aims to improve upon the existing Solvency I framework by adopting a risk based economic approach; while taking into account strong Enterprise Risk Management (ERM) principles.

To comply with Solvency II regulations, a company has to analyze the risks involved in its business, define the risk profile and satisfactorily demonstrate its capabilities to handle the - capital adequacies, governance and ERM processes; to handle the risk.

Three Pillars of Solvency II
Below are the three Solvency II Pillars:

Pillar I - Quantitative Requirements

Primary focus on Capital, Asset Liability Management and Investment regulations

Pillar II - Qualitative Requirements

Enterprise Risk Management, Governance, Supervisory Intervention, ...
... etc

Pillar III - Supervisory Reporting and Disclosure

Periodically disclose information to public and supervisors about risks and capital adequacy

For the compliance requirement of the first pillar, there are two capital requirements (i.e.) SCR (Solvency Capital Requirement) and MCR (Minimum Capital Requirement) that shall play a major role in terms of supervisory intervention.

SCR is requirement pertaining to the risk and maintains the solvency control level. A firm can calculate SCR based on the European Standard Formula or its own internal ones. Organizations that choose to use their own risk models to calculate capital requirements need to get it validated by their supervisory body. It quantifies risks that are faced by a insurer and takes risk mitigation strategies in to account. Failure to meet MCR may initiate supervisory intervention with actions as severe as withdrawal of authorization.

To meet the qualitative requirement of the second pillar, an organization should have well laid out policies of risk management and appropriate governance policies to ensure the same.
Third pillar demands insurance or re-insurance firms to follow a standard procedure of disclosing information to all the stake holders - the supervisors and public to ensure market discipline and stability. The level of information shared to the public varies from the information shared to the supervisors. Organizations are advised to share more information to the supervisors.

Change

Apart from the changes that are part of the three pillars of Solvency II, it will also bring other changes. As the chairman of CIEOPS (Committee of European Insurance and Occupational Pensions Supervisors) says,

Solvency II is not just about capital. It is a change of behaviour.

- Thomas Steffen, Chairman, CEIOPS

Solvency II not only brings financial, risks, governance and technical changes, but also bring in the need for change in behaviour. All the stake holders need to understand their roles & responsibilities with regard Solvency II, how are they interdependent and their responsibilities towards mitigation of risks. Awareness must be created within the organization to ensure that all stake holders are informed and align to the cultural change of the new Solvency II requirements.

Insurance groups may also have to streamline the way they function and extend their co-ordination. Supervisory groups will get added powers to ensure action is taken on any kind of risks. To know more information on Solvency II, read the official journal of the European Union. MetricStream offers Solvency II compliance solution that enables insurance companies follow a streamlined approach towards risk and compliance management.