Solvency 2
Related external information
Solvency 2 is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency 1 requirements.
Application:
Solvency 2 will apply to all insurance and reinsurance firms with gross premium income exceeding EUR5m or gross technical provisions in excess of EUR25m (please see Article 4 of the Directive for full details).
In a nutshell:
- Solvency 2 will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurers with a view to reducing the likelihood of an insurer failing;
- The strengthened regime should reduce the possibility of consumer loss or market disruption in insurance
Central elements:
Central elements of the Solvency 2 regime include:
- Demonstrating adequate Financial Resources (Pillar 1): applies to all firms and considers key quantitative requirements, including own funds, technical provisions and calculation of the Solvency 2 capital requirements (the Solvency Capital Requirement - SCR, and Minimum Capital Requirement - MCR) through either an approved full or partial internal model or the European standard formula approach.
- Demonstrating an adequate System of Governance (Pillar 2): including effective risk management system and prospective risk identification through the Own Risk and Solvency Assessment (ORSA).
- Supervisory Review Process: the overall process conducted by the supervisory authority in reviewing insurance and reinsurance undertakings, ensuring compliance with the Directive requirements and identifying those with financial and / or organisational weaknesses susceptible to producing higher risks to policyholders.
- Public Disclosure and Regulatory Reporting Requirements (Pillar 3).
Adoption procedure:
Solvency 2 is being created in accordance with the Lamfalussy four-level process:
- Level 1: framework principles – this involves developing a European legislative instrument that sets out essential framework principles, including implementing powers for detailed measures at Level 2
- Level 2: implementing measures – this involves developing more detailed implementing measures (prepared by the Commission following advice from CEIOPS) that are needed to operationalise the Level 1 framework legislation
- Level 3: guidance – CEIOPS works on joint interpretation recommendations, consistent guidelines and common standards. Additionally, CEIOPS undertakes peer reviews and compares regulatory practice to ensure consistent implementation and application.
- Level 4: enforcement – more vigorous enforcement action by the Commission is underpinned by enhanced cooperation between member states, regulators and the private sector.
The Level 1 Directive text was adopted by the European Parliament on 22 April 2009 and was endorsed by the Council of Ministers on 5 May 2009 thus concluding the legislative process for adoption. This was a key step in the creation of Solvency 2; the Directive now includes a 'go live' implementation date of 31 October 2012 for the new requirements, which will replace our current regime.
Discussion Paper 08/4:
In September 2008 we published a Discussion Paper (DP) which represents the start of a programme of preparatory work for Solvency 2 for the UK insurance market. It highlights and explains key elements of the new regime, and identifies the actions that insurers should presently be undertaking in anticipation of its adoption.
Please follow the link below to access the discussion paper:
Feedback Statement:
Within DP08/4 we invited firms to respond to a series of questions around key elements of Solvency 2. Many responses were received from insurers, trade associations, and consultants to whom we responded through a feedback statement on 6 May 2009.
Please follow the link below to access the feedback statement:
IMAP Update
In order to help insurers intending to seek approval to use an internal model under Solvency 2, the FSA plans to publish regular updates on its website about IMAP activity. February's update provides information on Pre-application qualifying criteria; Pilot programme and Thematic Review progress; and CEIOPS final and draft advice to the European Commission.
Solvency 2 - IMAP Update [PDF] - February 2010
Solvency 2 - IMAP Update [PDF] - October 2009
Pre-Application Qualifying Criteria Template
Pre-application is an essential element of the Solvency 2 internal models regime. We indicated in DP08/4, and in the individual letters sent to firms, that the timing of the start of their pre-application would be subject to them being assessed against certain qualifying criteria
Please follow the link below to access the Pre-Application Qualifying Criteria Template, which may be downloaded, completed and submitted:
Solvency 2 - IMAP Pre-application qualifying criteria assessment template [DOC] - February 2010
Note that the FSA approach is in line with CEIOPS CP80 paper on the pre-application process for internal models. The paper also gives guidance from CEIOPS on the other parts of the pre-application process.
Thematic Questionnaire
In December 2009 we asked all insurance firms that indicated they intend to use an internal model to fill in a questionnaire relating to the three thematic topics; risk management and use test; data management; model validation, including valuation of assets and liabilities. We have, so far, received 81 firm responses to the questionnaire.
Please follow the link below to access the questionnaire:
Solvency 2 - IMAP Thematic Review Questionnaire [XLS] - February 2010
Other useful documents:
External information:
The CEIOPS website provides access to current public consultations and issued responses to the European Commission's calls for advice.
The European Commission’s Solvency 2 index page gives links to helpful Solvency 2 material.