Solvency II at Ten
Introduction
Solvency II, Europe’s insurance regulation, entered into force on 1 January 2016. Although the regulation had been in the making since the mid-1990s, and was all but complete by 2009, it had to undergo major modification in the shadow of the Great Financial Crisis.
Today Solvency II is a rock-solid pillar, not only of European insurance regulation, but of insurance regulation globally. To those entering the industry in recent years it would be inconceivable to think of a world without Solvency II.
But it was not always so.
The years running up to implementation were tumultuous as both industry and regulators grappled with the downsides of market-consistent valuation, so brutally exposed by the events of the time.
The crux of the matter was that Solvency II introduced market-consistent valuation of assets and liabilities: bringing it in line with banking regulation and the thinking of the time. However, when asset prices collapsed and credit spreads soared those valuations were hugely distorted. To counter this a number of measures were debated to dampen the market impacts: these are the, now infamous, Long Term Guarantees Measures.
During those heady years, delay followed delay and at times it seemed like the whole project would be shelved, or at the very least massively watered down. But Europe being Europe, it somehow pulled it through and Solvency II has become a gold standard of modern insurance regulation. Even those regimes that do not follow it have adopted its principles or adapted to them.
Ten years on, Solvency II Wire has returned to many of the people who were involved in the process and asked them to reflect on that period and how it has shaped the industry, the regulatory landscape and their own personal experience.
Their contributions are listed in two groups: regulators and industry, based on their role at the time.
Notable participants in the project include former heads of the Insurance Unit at the European Commission: Karel Van Hulle and Nathalie Berger; the former chair of EIOPA Gabriel Bernardino and its first Executive Director Carlos Montalvo; the chair of the European Parliament’s ECON Committee Baroness Sharon Bowles; and Michael McRaith, who served as Director of the Federal Insurance Office at the U.S. Department of the Treasury.
All the participants in the Solvency II at Ten project have contributed content or information to Solvency II Wire. Each was asked the same eight questions. The answers are published as given, grouped by contributor and by question, so the reader can follow one person's account end to end or compare what everyone said about the same thing.
Ultimately Solvency II is a regulatory success story. Not perfect by any measure, but more than fit for purpose. And – more importantly in the present times – adaptive and adapting to a changing world and emerging risks.
Some would argue its adapting is too little and too slow. That might be so. But even its harshest critics would privately admit that Solvency II has brought much-needed change and professionalisation to the industry that is likely to stand it in good stead in years to come.
More importantly, the story of how Solvency II came to be has shown that regulation can successfully adapt to significant changes in circumstances. And as the world faces an ever-evolving risk landscape, one would hope that all those responsible for drafting future regulation could draw inspiration from the story of Solvency II.