SolvensII

Solvency II is a European Union regulatory framework for insurance and reinsurance companies, designed to harmonize capital, governance, and reporting across member states. Enacted as Directive 2009/138/EC, it became fully applicable on 1 January 2016, replacing Solvency I to strengthen policyholder protection and financial stability.

The framework rests on three pillars. Pillar I establishes quantitative requirements, including the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR). Liabilities are valued on a best-estimate basis with a risk margin, while assets are measured at market-consistent values. Insurers may use a standard formula or an approved internal model to calculate the SCR.

Pillar II covers governance and risk management. It requires robust governance arrangements, risk management systems, an actuarial function, and the own risk and solvency assessment (ORSA), with supervisory review to ensure ongoing adequacy of capital and risk controls.

Pillar III focuses on transparency through public disclosures and supervisory reporting, enabling market participants and supervisors to assess risk exposure and capital adequacy.

The directive applies to insurance and reinsurance undertakings and groups operating within the EU, including cross-border groups. Supervisory authorities oversee compliance, while bodies like EIOPA develop technical standards and guidance. Changes and delegated acts continue to refine valuation, calibration, and reporting.

Key features include a risk-based capital approach, proportionality to the size and risk profile of an insurer, the use of internal models where approved, and a forward-looking orientation through the ORSA. Solvency II aims to ensure insurers hold capital commensurate with risk and to improve risk management and transparency in the insurance sector.