Introduction of Solvency II
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by: connwilson
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Word Count: 458
Date: Mon, 26 Dec 2011 Time: 10:53 PM
Solvency II is an elementary review of the business models of insurers of Europe that has direct impact on mostly two things that is, capital adequacy and risk management. In other terms, it can be defined that Solvency II is a fundamental review of the capital adequacy management for the European insurance industry. It intends to launch extensive capital requirements and risk management standards that will enable to replace the current solvency requirements.
Solvency II was proposed and initiated by the European Commission in 2000 in order to implement a fundamental change to European insurance regulations. The entire plan aims to create a more synchronized and risk-orientated solvency system resulting in capital requirements that are more insightful of the risks being run. There are certain objectives set by European Commission that involves, deepening the combination of the European Commission insurance market, to improve the protection level of policyholders and beneficiaries, to improve the international competitiveness of European insurers and to carry out better regulation of the European Union insurance markets.
The European Solvency I structure for insurers depended on the need of maintaining adequate assets to cover discreet technical provisions, with a minimum level of required capital that can be derived from a simple formula. But these calculations are made just by making certain assumptions that include unquantifiable levels of caution which are not easily comparable between companies or even across regions. The result derived from it is a solvency standard that has little sensitivity to the level of the risks that are being run. It even offers limited transparency over financial strength.
Solvency II is facing many challenges to remain on course. There are certain tasks that are highly technical, and then there is another debate over the principles-based approach implanted in Solvency II. There are many international insurers who show full support to it but there are even some companies and national regulators who still prefer to retain the rules-based regulation.
There are many medium-sized firms throughout Europe that have fallen behind. Solvency II is one of all those rare cases where introduction of new regulations can actually improve the business conditions, but there is a condition to it that this should be adopted whole heartedly. Henceforth, by following this strictly, the process and disciplines will benefit the firms leaving the rest at a competitive disadvantage.
From the analysis, it can be indicated that the middle market is having the maximum risk. For such medium-sized companies, to maintain a competitive edge is very important, but in reality, these companies often relate Solvency II and the shift towards Enterprise Risk Management as a regulatory responsibility. Hence, Solvency II can even help in making the condition of a medium-sized company much better and leading it to a higher level.
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Interview of Bill McGrath (Global CIO for AOL) on how you can create significant competitive advantage through Technology Innovation and Solvency II.
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