CHAPTER 4 - B Flashcards
Solvency II
Solvency II is a pan-European solvency regime which operates across all EU Member States.
main aim of Solvency II
simply to ensure that insurers are there to pay their policyholders’ claims when needed.
The stated objectives of Solvency II are:
* better regulation
* deeper integration of the EU insurance market
* enhanced policyholder protection
* improved competitiveness of EU insurers
three ‘pillars’ of Solvency II
- Quantitative requirements
- Supervisory review
- Disclosure
Quantitative requirements
requires insurers to demonstrate that they
have adequate financial resources available to cover exposure to risks.
key difference with Solvency II is the consideration of business risk over and
above the insurance-related risks.
Insurers now have to engage in a far more wide-ranging analysis of business risk
(e.g. the risk of reinsurers failing, or the building being destroyed
solvency capital requirement (SCR).
the insurer must keep a certain amount
of assets available in excess of its liabilities; this amount is referred to as the
Supervisory review
requires that every insurer has an
effective risk management system that considers all risks to which it is exposed.
risk assessment process must be owned and implemented by the senior management
Having worked out the levels of various risks and measured the financial
requirements in accordance with the calculations set out in the Solvency II rules,
the insurer must ensure that it holds sufficient capital against those risks.
own risk and solvency assessment (ORSA)
the name given to the internal review undertaken by insurers.
This covers the entirety of the processes
and procedures employed by an insurer to identify, assess, monitor, manage and
report the short- and long-term risks
to determine the capital necessary for its overall solvency needs to be met at all times.
Disclosure
The EU is aiming for harmonised supervisory reporting and disclosure across all EU Member States.
insurers have to disclose publicly more
information than they have generally done previously
Examples of business risks faced by an insurer
Credit/counterparty risk: premiums not being paid
Operational risk: Market systems not being available for use.
Enterprise risk: Many risks do not just have an impact on one area of the business
The Solvency II and Insurance (Amendments etc.) (EU Exit) Regulations 2019
ensure that the provisions of Solvency II continued to work in the UK even though it is now outside the EU.
Financial Services and Markets Act 2023
which came into effect on 29 August 2023, revokes the regulations mentioned
above and brings the responsibility for the control of the UK financial services industry back ‘in house’ to the UK, rather than following EU requirements.
Government will continue to set the overall policy framework. The regulators will then set the detailed rules to be followed by individual regulated firms.
European Insurance and Occupational Pensions Authority (EIOPA)
the overarching EU supervisory body of Solvency II.
core responsibilities are to increase the stability of the financial system and the
transparency of markets and financial products, as well as the protection of policyholders.
Its main goals are to:
- provide better protection for consumers
- rebuild their trust in the financial system;
- ensure a high, effective and consistent level of regulation and supervision
- strengthen oversight of cross-border groups; and
- promote a coordinated EU supervisory response.
