Solvency II is an EU legislative directive that seeks to harmonize EU insurance regulation, primarily in terms of the capitol insurance companies must hold. This works to reduce the risk of insolvency.
The goal? To unify a single EU insurance market and enhance consumer protection.
As summarized by PWC, its objectives are to:
- Improve consumer protection: a uniform and enhanced level of policyholder protection across the EU.
- Modernize supervision: the “Supervisory Review Process” shifts focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems.
- Deepen EU market integration: by harmonizing supervisory regimes.
- Increase international competitiveness of EU insurers.
Pillar I: Quantitative Requirements
The first pillar of the EU directive has three directives. The first is a balance sheet evaluation, the second is a Solvency Capital Requirement (SCR) and the third is a Minimum Capital Requirement (MCR.) Qualitatively, this pillar involves gathering data from multiple sources and completing complex calculations. Organizationally, this involves standardization across operations and group reporting.
Pillar II: Qualitative Requirements & Supervision
The second pillar includes the need for a System of Governance, an Own Risk & Solvency Assessment (ORSA) and a Supervisory Review process. These narrative disclosures are complex in their own right and are repeated quarterly and annually.
Pillar III: Disclosure Requirements
The third pillar, active as of January 1st 2016, is the final stretch of Solvency II’s implementation. It requires Public Disclosure of Financial Condition and Solvency Reports (FCSR) and Common Supervisory Reports (RSR).