SolvencyII

Solvency II is a regulatory framework for insurance companies in the European Union. It came into effect on January 1, 2016, replacing the previous Solvency I Directive. The primary goal of Solvency II is to ensure that insurance companies have sufficient capital to cover their liabilities and to protect policyholders. It aims to create a more robust and harmonized insurance market across the EU.

The framework is based on three pillars. Pillar 1 focuses on quantitative requirements, including capital adequacy and risk assessment. It mandates that insurers hold a Solvency Capital Requirement (SCR) and a Minimum Capital Requirement (MCR), which are calculated based on the specific risks each company faces. Pillar 2 deals with qualitative requirements, such as governance, risk management, and internal control systems. It requires insurers to have a sound governance structure and a comprehensive risk management process. Pillar 3 concerns supervisory review and public disclosure. It sets out requirements for insurers to report their solvency and financial position to national supervisory authorities and to disclose relevant information to the public.

Solvency II is designed to be risk-based, meaning that the capital requirements are proportionate to the risks undertaken by an insurer. This encourages insurers to better understand and manage their risks. The directive has led to significant changes in how insurance companies operate, including increased focus on risk management, governance, and capital planning. It also aims to enhance policyholder protection and foster a more competitive and efficient European insurance market.