Solvency II is the Basel III of the insurance world. It is the new capital adequacy regulation for the industry: ensuring insurers have sufficient funds to cover their future liabilities. Its effects could carry far beyond the specialised realm of insurance and reinsurance.
Solvency II is a bit of a nightmare, and not only because you don’t quite know which term to google: solvency two’, ‘solvency II’ or ‘solvency 2’, but because it’s demanding the industry make major changes in a short space of time. What’s more, these changes are still being defined as firms are told to be ready for implementation by January 2013.
So here is a menu du jour of some of the issues the Directive will dish-up. Broadly speaking they divide into two: the effects on individual firms and the effects on markets, with a healthy dose of crossover between the two. But first un petit aperitif, some background if you like. The FSA describes the Solvency II Framework Directive as follows (my bold):
“Solvency II will set out new, stronger EU-wide requirements on capital adequacy and risk management for insurers with the aim of increasing protection for policyholders. The strengthened regime should reduce the possibility of consumer loss or market disruption in insurance.”The Directive is about much more than capital reserves, it engages with the governance and supervisory processes as well as reporting disclosures of firms.