Solvency II Directive published

On 17 December 2009 the Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) was published in the Official Journal L 335 of the EU.

This new framework directive will apply to insurers from the end of October 2012 and will also repeal with effect from 1 November 2012 the present legal expenses insurance directive 87/344/EC.

You find the new directive in all official languages under:

http://eur-lex.europa.eu/JOHtml.do?uri=OJ:L:2009:335:SOM:EN:HTML

The Articles of Directive 87/344/EC are transposed as follows:

The changes made to the wording of the original directive are meant as a recast with the intention of clarifying the provisions but do not need transposition into national law (see Article 309 of Directive 2009/138/EC).

Background:

'Solvency II' will introduce economic risk-based solvency requirements across all EU Member States for the first time. As these new solvency requirements will be more risk-sensitive and more sophisticated they will enable a better coverage of the real risks run by any particular insurer. They will apply to almost all EU insurers and reinsurers; only the smallest ones (one condition is having a gross written premium income of less than €5 Mio. annually) will not be subject to these new rules (they can choose to 'opt in' if they wish). Equally, the new regime introduces the proportionality principle by taking account of small and medium sized insurers: it will allow for a range of methods to be used in order to meet the general principles, tailored to the nature, size and complexity of the insurer. For example, simplifications will be provided for the calculation of technical provisions and the future European Standard Formula, to be applied where an insurer’s operations are relatively straight-forward. With respect to the qualitative requirements, in accordance with the proportionality principle, a smaller insurer conducting simple business will not have to have the same kind of systems and controls as a larger insurer with multiple business lines in multiple countries.

Solvency II is based on a three pillar approach which is similar to the banking sector (Basle 2) but adapted for insurance.

• The first pillar contains the quantitative requirements. There are two capital requirements, the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR), which represent different levels of supervisory intervention. The SCR is a risk-based requirement and the key solvency control level. Solvency II sets out two methods for the calculation of the SCR: the European Standard Formula or firms' own internal models. The SCR covers all the quantifiable risks an insurer or reinsurer faces and takes into account of any risk mitigation techniques; its final calibration will be included in an implementing measure that will contain the technical detail needed for insurers to run the formula in practice. The Commission intends to have the implementing measures in place at least 12 months before insurers will need to start applying the new rules, meaning that they would need to be agreed before October 2011. The MCR is a lower requirement and its breach triggers the ultimate supervisory intervention: the withdrawal of authorisation.
• The second pillar contains qualitative requirements on undertakings such as risk management as well as supervisory activities.
• The third pillar covers supervisory reporting and disclosure. Firms will need to disclose certain information publicly, which will bring in market discipline and help to ensure the stability of insurers and reinsurers (disclosure). In addition, firms will be required to report greater amount of information to their supervisors (supervisory reporting).

Solvency II will also streamline the way that insurance groups are supervised and recognises the economic reality of how groups operate. The new regime will strengthen the powers of the group supervisor, ensuring that group-wide risks are not overlooked, and demand greater cooperation between supervisors. Groups will be able to use group-wide models and take advantage of group diversification benefits.

For more information: http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm