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.
Solvency 2 should help supervisors protect policyholders' interests more effectively by making prudential failure less likely, and reducing the probability of consumer loss or market disruption. It should also make it easier for firms to do business across the EU as the current patchwork of varying local standards will be replaced by more harmonised requirements.
The framework under development consists of three ‘pillars’. Pillar 1 sets out a valuation standard for liabilities to policyholders and the capital requirements firms will be required to meet for insurance, credit, market and operational risk. Capital requirements may be calculated using a standard formula or, if firms have supervisory approval, they may use their own capital models. Pillar 2 will be the supervisory review process that focuses on evaluating the adequacy of capital and risk management systems and processes. Supervisors may decide a firm should hold additional capital against any risks not adequately covered in Pillar 1. The aim of Pillar 3 disclosures is to harness market discipline by requiring firms to publish certain details of their risks, capital and risk management. We expect that Solvency 2 will require firms to value their assets and liabilities on a market-consistent basis and that more risk-sensitive capital requirements will address asset as well as liability risks, consistent with the domestic prudential reforms that we implemented for insurers in 2004.
The Lamfalussy framework’s four-level approach will be used to develop the new Solvency regime:
- Level 1 - Primary legislation to define broad 'framework' principles.
- Level 2 - The Commission adopts technical implementing measures, assisted by a regulatory committee and taking account of advice from the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)
- Level 3 - Cooperation among national regulators to ensure consistent interpretation of Level 2 rules.
- Level 4 - Enforcement to ensure consistent implementation of EU legislation.
Work on Solvency 2 is progressing well. The European Commission published its draft proposal for the Level 1 text in July 2007. The European Council Working Group (CWG) and the European Parliament have been discussing this text through Level 1 negotiations with HM Treasury, supported by the FSA, representing the UK in the CWG.
Progress has been made under the Slovenian presidency of the CWG and we expect political agreement of the Level 1 text by the end of 2008.
At the same time the FSA is a member of CEIOPS, which provides technical advice to the Commission. Currently, CEIOPS is drafting advice on the Level 2 implementing measures and has conducted a number of quantitative impact studies (QIS) to test the financial impact and suitability of proposed requirements. QIS3 was completed in 2007 and a strong participation by the UK industry has helped us gain valuable data to inform negotiations. QIS4 commenced in April 2008 and we are encouraging all firms to get involved to help build on this momentum. Documents relating to QIS4 can be found below, or alternatively any questions can be sent to qis4@fsa.gov.uk
QIS4 - related documents
Guidance for Firms [PDF]
Life Illustrative Example [XLS]
Non Life Illustrative Example [XLS]
UK Addendum to QIS4 Technical Specification - Equity Risk [PDF]
Life Risk Margin Helper Instructions [PDF]
Life Risk Margin Helper [XLS]
Non Life Risk Margin Helper Instructions [PDF]
Non Life Risk Margin Helper [XLS]
Non Life Business Segmentation [PDF]
FX Rates [XLS]
FAQ [PDF]
QIS3 - related documents
FSA UK country report: The third Quantitative Impact Study (QIS3) for Solvency II [PDF]
QIS3 objectives & key items of data and information for firms to provide [PDF]
QIS3 - Non-life business segmentation [PDF]
Suggestion on the segmentation of non-life business according to QIS3 lines of business
QIS3 - Guide for the completion of the spreadsheet [PDF] - updated 15 May 2007
Short note offering guidance to firms on the completion of the various tabs of the QIS3 spreadsheet
QIS3 FAQs [PDF] - updated 20 June 2007
Suggested FSA responses to QIS3 queries and pre-test comments raised by insurance firms.
QIS2 - related documents
UK Country Report for QIS 2 [PDF]
QIS2 Specification – Proposed approach to NL CAT risk for UK firms [PDF]
note about Nat-Cat scenarios for non-life firms
QIS2 – Input data required to complete the spreadsheet [PDF]
short note offering guidance to firms on the completion of the various tabs of the QIS2 spreadsheet
QIS2 FAQs [PDF]
Suggested FSA responses to QIS 2 queries raised by insurance firms
QIS2 Pre-test FAQs [PDF]
Suggested FSA responses to QIS 2 pre-test queries raised by insurance firms
Policy documents
Consultation paper 06/12:
Implementing the Reinsurance Directive
HMT/FSA Discussion Paper: [PDF] - November 2006
Supervising insurance groups under Solvency II
HMT/FSA Discussion Paper: [PDF] - February 2006
Solvency 2: a new framework for prudential regulation of insurance in the EU
External information
GI best estimate provisions
Note by the UK Actuarial Profession on the points to be considered when estimating GI provisions on a best estimate basis.
CEIOPS QIS 2 Questions and answers
Methodological issues raised by participants and supervisors
Actuarial Profession QIS 2 FAQs
CEIOPS website provides access to current public consultations and issued responses to the Commission’s calls for advice.
The European Commission’s Solvency 2 index page gives links to relevant documents (including the Framework for Consultation and the current Solvency 2 Roadmap)