Solvency II – commentary from the Task Force

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The European Union’s Economic & Financial Affairs Council formally adopted the Solvency II framework directive on 5 May, bringing the proposed risk-based capital regulatory regime for European insurers one step closer to reality. The vote by the Council, made up of the economic and finance ministers of the 27 EU member states, means the directive is on track for implementation by 31 October 2012. The European Parliament voted in favor of the directive on 22 April 2009. The only remaining formalities are translations and publication in the Official Journal of the EU.

By 2012, Solvency II will be a modern, sophisticated, risk-sensitive regime by which all European insurers will determine their capital requirements. It is expected to provide a catalyst to transform the way insurance companies run their business. Insurers will need to demonstrate strong risk management practices that extend across their business decision-making processes at senior executive and board levels. Solvency requirements will involve more complex calculations of factor-based formulas, stress testing and financial models. Implementation will require insurers to ramp up their risk management processes and models by 2012. They must also make significant changes to financial systems, change their balance sheet for reporting to a fair-value basis for Solvency II, and prepare for greater public disclosure of financial statements, risk measures and capital calculations.

The final adoption of the Solvency II directive on 5 May is of major significance and will influence the future reform of global regulation. The International Association of Insurance Supervisors (IAIS) has issued a series of policy papers that propose global regulatory standards that are similar in many respects to Solvency II. Solvency II signals that these global standards will be in practice, implemented across the European bloc and impacting operating companies around the world. Local regulators will now be asking how fast and far they want to develop their own regimes, against their local political and economic demands. As regulation continues to evolve, and become more globally interconnected, there is the potential for greater regulatory coordination and a combined global industry viewpoint in areas where there may have been a less unified approach in the past.

Current market conditions should also give further impetus for insurers to implement appropriate enterprise-wide risk management frameworks and to improve their management of capital and liquidity. Recent economic uncertainty has demonstrated the need for contingency planning and scenario analysis to also prepare firms for future adverse events.

EY believes Solvency II and its envisaged principles and risk-based approach of regulation is positive for policyholders and the industry – and further supports financial stability.