EUROPEAN UNION: Solvency II Goes Live

Tuesday January 5 2016

On 1^st January 2016, Solvency II, the new supervisory framework for insurance and reinsurance companies went live. The Directive aims to provide greater protection to policyholders by reducing the probability of an insurance firm failure. The framework better aligns capital requirements to firms’ asset and liability profiles and enhances the quality of capital, providing greater protection. It also provides incentives to strengthen risk management, reporting and disclosure across the industry.

Solvency II replaced Solvency I, which represented 14 EU Directives. As of 1^st January 2016, the 14 EU Directives were replaced by Solvency II. Solvency II is one common regime applied by all 28 EU Member States.

The Solvency II framework is divided into three ‘pillars’:

Pillar 1 sets out quantitative requirements, including the rules to value assets and liabilities (in particular, technical provisions), to calculate capital requirements and to identify eligible own funds to cover those requirements;

Pillar 2 sets out requirements for risk management, governance, as well as the details of the supervisory process with competent authorities; this will ensure that the regulatory framework is combined with each undertaking’s own risk-management system and informs business decisions;

Pillar 3 addresses transparency, reporting to supervisory authorities and disclosure to the public, thereby enhancing market discipline and increasing comparability, leading to more competition.

Throughout 2016, the European Insurance and Occupational Pensions Authority (EIOPA) will start collecting evidence and experiences concerning the application of Solvency II. A review of the capital requirements will be held in 2018. Furthermore, EIOPA will submit its advice to the European Commission in 2018. EIOPA may propose the introduction of further simplifications wherever deemed appropriate.

Separately EIOPA will provide an annual report to the European Council, Parliament and Commission on the implementation of the so-called long term guarantees package.

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