Will Solvency II, when implemented, benefit policyholders of insurance companies?
Solvency II has reached the critical stage where it will be put into action by 2013 by the European Union (EU). To understand why Solvency II was initiated we have to understand the background and the factors which lead to the development of Solvency II. Solvency I was a minimum harmonization directive introduced in the early 1970s. It allowed for differences to emerge in the way that insurance regulation was applied across Europe leading to different regimes. It was also primarily focused on the prudential standards for insurers and did not include requirements for risk management and governance within firms. (FSA) The Level 1 directive text of Solvency II was adopted by the EU Parliament on 22 April, 2009 and endorsed by the Council of Ministers on 5 May, 2009. The European Council formally adopted the Directive on 10 November 2009. On 1 November 2012, Solvency II will go live to replace Solvency I requirements and the implementation will be pushed to 1 January, 2013 as per an amendment via the Omnibus II Directive.
Solvency II will be adopted by all 27 EU member states and three of the European Economic Area (EEA) countries. Policyholders’ interests would be more effectively protected by making firm failures less likely to happen and by reducing the probability of consumer loss and market disruption. Firms will be able to do businesses throughout the EU easily as everything will be standardized instead of the current varying local standards.
Solvency II applies to all insurance firms with gross premium income exceeding €5 million or gross technical provisions in excess of €25 million. Some insurance firms will be out of scope depending on the amount of premiums they write, the value of technical provision or the type of business written. Solvency II principles and rules apply to Lloyd’s of London syndicates in full. (FSA) Solvency II aims to achieve uniformity across Europe based on the following:
· market consistent balance sheets;
· risk-based capital;
· own risk and solvency assessment (ORSA);
· senior management accountability; and
· Supervisory assessment.
In preparedness for implementing Solvency II, companies have been administering Stress Tests to determine if companies are ready to comply with the new directive. On 23 March 2011, the specification for the insurance sector 2011 EU-wide stress test was published. The aim of the exercise is to assess the resilience of the insurance sector to adverse conditions and the potential systemic risk under stress. (Towers Watson) The exercise aims to cover at least 50% of each country in the EU/EEA member states and Switzerland based on statutory gross premium written for both life and non-life business. This will include more than 200 insurers, including the large and important European insurance groups. The exercise is effective immediately and the companies have until 31 May 2011 to report their results to their national/lead supervisors who will validate the results and report them to EIOPA in early June. The aggregated results will be presented to the Economic and Financial Committee (EFC) and the European Systemic Risk Board (ESRB). The results will be publically available in July 2011. (Towers Watson)
The benefits of Solvency II will be in the long-term. According to Hector Sants of FSA, significantly enhanced prudential regime for insurers will provide the policyholders greater protection. Solvency II will deliver:
· A foundation of market-consistent valuations for both assets and liabilities which will give both markets and our supervisors much greater clarity of a firm’s position.
· A requirement to apply stresses to both assets and liabilities in order to get a risk-sensitive level of required capital.
· Greater market discipline through increased public disclosure.
· More information on firms to allow supervisors to have a total view of the business model.
· Much stronger emphasis on risk management and forward-looking risk governance which will embed a stronger risk culture in firms, the development of enterprise risk management, and investment in the necessary skills to ensure a firm’s management truly understands its business model risks.
Also, non-EU member countries would have to develop and adopt a more modern approach to risk-sensitive capital setting, disclosure, group assessment and risk management as the intention would be to reduce risk to policy holders from countries that are not equivalent.
References:
FSA. (n.d) Background to Solvency II. From http://www.fsa.gov.uk/Pages/About/What/International/solvency/background/index.shtml
FSA. Sants, Hector. Solvency II in context. 18, April 2011 from http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2011/0320_hs.shtml
Towers Watson. (n.d) e-Alert: Publication of 2011 EU-wide stress test specification for insurance sector. From http://www.towerswatson.com/microsites/solvencyii/analysis.asp?articleid=4191
Credit:ivythesis.typepad.com
0 comments:
Post a Comment