Solvency Ii Framework: Life Insurance Compliance Requirements

Solvency II is a risk-based capital regime for insurance and reinsurance undertakings in the EU, which came into force in January 2016. It applies to most insurers and reinsurers with their head office in the European Union, including mutuals, and companies in run-off. Solvency II sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting, and public disclosure.

The regulatory framework is built on a three-pillar structure: Pillar I sets the quantitative requirements, including the assets and liabilities valuation and capital requirements; Pillar II sets the qualitative requirements, including governance and risk management; and Pillar III sets the supervisory reporting and public disclosure requirements.

Solvency II imposes formal governance requirements, mandating roles such as a risk management function, an independent audit function, an actuarial function, and a compliance function. It also requires insurers to hold sufficient economic capital to protect policyholders and meet their financial claims. The required capital is called the solvency capital requirement (SCR) and covers all the risks that an insurer faces.

Solvency II will replace existing life and non-life directives, the reinsurance directive, and various other insurance-related directives.

Solvency II applies to most insurers and reinsurers with their head office in the European Union (EU)

Solvency II is a risk-based capital regime based on three "pillars". It applies to most insurers and reinsurers with their head office in the European Union (EU), including mutuals, and companies in run-off unless their annual premium income is less than €5 million. Solvency II sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting, and public disclosure.

The first pillar of Solvency II, "Pillar 1", sets out the quantitative requirements, including the assets and liabilities valuation and capital requirements. This pillar includes the Solvency Capital Requirement (SCR), which is calculated using either a standard formula or a bespoke internal model that has been approved by the insurer’s supervisor. The SCR is the amount of capital an insurer needs to absorb unexpected losses and meet the obligations towards policyholders. The Minimum Capital Requirement (MCR) is set at a lower threshold and should not be less than 25% of the SCR.

The second pillar, "Pillar 2", sets out the qualitative requirements, including governance and risk management of the undertakings and the Own Risk and Solvency Assessment (ORSA). This pillar includes the "Supervisory Review Process", which shifts supervisors’ focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems.

The third pillar, "Pillar 3", sets out the supervisory reporting and public disclosure requirements. Insurers are required to publish details of the risks facing them, capital adequacy, and risk management. Transparency and open information are intended to assist market forces in imposing greater discipline on the industry.

Solvency II is implemented in all 28 EU Member States, including the UK, by 1 January 2016. It replaced 14 EU insurance directives and introduced a harmonised EU-wide insurance regulatory regime. The legislation has four levels: Level 1 (primary legislation), Level 2 (implementing measures), Level 3 (guidelines), and Level 4 (post-implementation enforcement).

Solvency II has a risk-based approach that assesses the overall solvency of insurance and reinsurance undertakings

Solvency II is a risk-based capital regime, based on three pillars. It sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting, and public disclosure. The three pillars are as follows:

Pillar 1: Sets the quantitative requirements, i.e. the assets and liabilities valuation and capital requirements. It includes a 'best estimate' of liabilities and a risk margin (where the liability is not appropriately hedged). The risk-based capital requirement, the Solvency Capital Requirement (SCR), will be calculated using either a standard formula or a bespoke internal model that has been approved by the insurer’s supervisor.

Pillar 2: Sets the qualitative requirements, including governance and risk management of the undertakings and the Own Risk and Solvency Assessment (ORSA). It also includes a supervisory review process, which shifts supervisors’ focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems.

Pillar 3: Sets the supervisory reporting and public disclosure requirements. Insurers are required to publish details of the risks facing them, capital adequacy, and risk management. Transparency and open information are intended to assist market forces in imposing greater discipline on the industry.

Solvency II applies to most insurers and reinsurers with their head office in the European Union (EU), including mutuals, and companies in run-off unless their annual premium income is less than €5 million. It will be implemented for insurers on 1 January 2016. Solvency II will replace existing life and non-life directives, the reinsurance directive, and various other insurance-related directives.

Solvency II is a comprehensive programme of regulatory requirements for insurers, covering authorisation, corporate governance, supervisory reporting, public disclosure, and risk assessment and management, as well as solvency and reserving. It aims to ensure a uniform and enhanced level of policyholder protection across the EU, giving policyholders greater confidence in the products of insurers.

Solvency II sets out requirements applicable to insurance and reinsurance companies in the EU to ensure adequate protection of policyholders and beneficiaries

Solvency II is a risk-based capital regime that came into force in the European Union in 2016. It applies to most insurers and reinsurers with their head office in the European Union, including mutuals, and companies in run-off. Solvency II sets out requirements applicable to insurance and reinsurance companies in the EU with the aim of ensuring the adequate protection of policyholders and beneficiaries.

The regulatory framework of Solvency II is built on a three-pillar structure:

Pillar I: Quantitative Requirements

Pillar I sets out the assets and liabilities valuation and capital requirements. It includes a 'best estimate' of liabilities and a risk margin. Capital is divided into 3 Tiers (1-3) reflecting permanence and the ability to absorb losses. The risk-based capital requirement, the Solvency Capital Requirement (SCR), is calculated using either a standard formula or a bespoke internal model. There is also a Minimum Capital Requirement (MCR) set at a lower threshold.

Pillar II: Qualitative Requirements

Pillar II sets the qualitative requirements, including governance and risk management of the undertakings and the Own Risk and Solvency Assessment (ORSA). It includes formal governance requirements, mandating roles such as a risk management function, an independent audit function, an actuarial function, and a compliance function. The insurer's processes for risk management should be set out in an ORSA.

Pillar III: Supervisory Reporting and Public Disclosure

Pillar III sets the supervisory reporting and public disclosure requirements. It includes a private Regular Supervisory Report to be provided on a regular basis and a public annual report called the Solvency and Financial Condition Report (SFCR).

The three pillars form a coherent approach that allows for understanding and managing risks across the sector. The requirements are applied in a manner that is proportionate to the nature, scale, and complexity of the risks inherent to the business of the insurance and reinsurance undertakings.

Solvency II will replace existing life and non-life directives, the reinsurance directive and various other insurance-related directives

Solvency II is a risk-based capital regime based on three pillars. It is a regulatory framework that came into force in 2016 for insurers and reinsurers in Europe. It sets out requirements for insurance and reinsurance companies in the EU to ensure adequate protection of policyholders and beneficiaries.

Solvency II will replace the following:

• Existing life and non-life directives
• The reinsurance directive
• Various other insurance-related directives (but not the insurance mediation directive)

Pillar 1 of Solvency II sets the quantitative requirements, including the assets and liabilities valuation and capital requirements. Pillar 2 sets the qualitative requirements, including governance and risk management of the undertakings and the Own Risk and Solvency Assessment (ORSA). Pillar 3 imposes reporting and transparency requirements.

Solvency II is implemented for insurers and reinsurers with their head office in the European Union (EU), including mutuals and companies in run-off unless their annual premium income is less than €5 million. The directive should be applied in a way that is proportionate to the nature, scale, and complexity of the insurer.

The Solvency II legislation is implemented on three levels: Level 1 (Solvency II Directive), Level 2 (Delegated Regulation and Implementing Technical Standards), and Level 3 (Guidelines).

The Solvency II regime includes transitional arrangements in several areas, such as the calculation of Solvency Capital Requirements and some grandfathering of existing capital instruments. It introduces a harmonised EU-wide insurance regulatory regime, replacing 14 EU insurance directives.

Solvency II puts demands on the required economic capital, risk management, and reporting standards of insurance companies

Solvency II is a risk-based capital regime that applies to most insurers and reinsurers with their head office in the European Union (EU). It came into force on 1 January 2016, replacing existing life and non-life directives, and sets out regulatory requirements for insurance firms and groups, covering financial resources, governance, accountability, risk assessment and management, supervision, reporting, and public disclosure.

The detailed rules requiring investment of assets in a list of specified 'admissible assets' are replaced by the 'Prudent Person Principle', which places greater responsibility on the insurer for investment decisions and significantly increases reporting requirements in relation to assets. The insurer's capital should reflect its asset position, resulting in a need to match assets to liabilities as closely as possible.

Solvency II also imposes formal governance requirements, mandating roles such as a risk management function, an independent audit function, an actuarial function, and a compliance function. The insurer's processes for risk management should be set out in an Own Risk and Solvency Assessment (ORSA), which should include a risk-based assessment of the insurer's solvency needs based on its business and its own risk appetite and must be taken into account in running the business.

Pillar 3 requirements under Solvency II include a private Regular Supervisory Report and a public annual report called the Solvency and Financial Condition Report (SFCR). The role of the insurance supervisor is crucial to the success of Solvency II, as it depends largely on its implementation by insurance supervisors in a consistent manner.

Frequently asked questions