Through Solvency II, new supervisory and equity-capital requirements were introduced on 1 January 2016 with the aim of creating a comprehensive system for total solvency. “Total solvency” refers to furnishing an insurance company with equity capital for the purposes of covering all the risks of that company and ensuring fulfilment of obligations in relation to policyholders and business partners.
This new supervisory architecture pursues the following goals:
- Ensuring the protection of policyholders
- Creating uniform insurance-supervision law throughout the EU
- Introducing value-oriented and risk-specific management of (re)insurance companies
- Increasing the resilience of (re)insurance companies to negative developments
- Strengthening the stability of the finance system
- Promoting transparency and market discipline
As with Basel III (the equivalent for the banking sector), Solvency II is based on a three-pillar approach:
- The first pillar regulates the quantitative aspects. These particularly involve the valuation approaches and preparation of the Solvency II economic balance sheet including derivation of the equity-capital requirement. Another focal point is regulations regarding the risk-oriented capital requirements that must be calculated by the (re)insurance companies. This pillar is used as a basis for measuring the solvency of the (re)insurance companies and determining the equity capital needed to cover the risks.
- The second pillar regulates risk management and deals with qualitative requirements. These include the requirements relating to the governance system, which defines aspects such as the tasks and interaction of the key staff in the (re)insurance company. Furthermore, the second pillar of Solvency II predominantly relates to organising risk management, ensuring an effective control environment for the core processes, and performing a regular in-house risk and solvency assessment. This pillar is a factor in effective and sustainable management of the (re)insurance company.
- The third pillar concerns the insurance companies’ reporting requirements to supervisory authorities and disclosure requirements to the public. It therefore links the results of the first two pillars in a standardised and detailed form and provides a global picture of the (re)insurance company.