Solvency II is a European Union Directive that sets out a single set of prudential and supervisory requirements for almost all European insurance and reinsurance companies (only the very smallest are not in scope). After years in development, and over £3 billion spent by UK firms on implementing it, Solvency II came into force in January 2016, representing the largest change to insurance regulation in the EU for over 30 years. In the UK, the PRA is responsible for its implementation.
Solvency II has three pillars:
Pillar 1 – valuation of assets/liabilities and capital requirements
This sets out how insurers should value their liabilities (including the money that gets paid to policyholders in the event of a claim) and their assets (such as government bonds, shares, property, etc.) The rules also cover the amount of funds insurers need to hold in reserve as a buffer to make sure they can pay policyholders' claims.
Pillar 2 – governance and risk management
This sets out how insurers should be governed, and how insurers identify, measure, monitor, manage and report the risks to which they are exposed. This ensures that insurers' businesses are managed to a high standard.
Pillar 3 – reporting and disclosure
This sets out what information insurers report on their business. Some reports are required to be publically available, whilst others are privately reported to the national regulator. This information allows the public (and the regulator) to understand more about the businesses that provide insurance to individuals and institutions.
As a regulatory regime, Solvency II seeks to harmonise regulation for all insurers across Europe. It is intended to give policyholders confidence when buying insurance that they will receive payment when they make a claim. Under the Solvency II regime, policyholders should expect the same level of confidence whether they buy their insurance products from large or small insurers, or from a stand-alone insurer or from an insurer which is part of a group.
Insurers’ financial resources, as directed by the Solvency II rules, ensure that the chance of an insurer being unable to pay claims during any one year is no more than 1-in-200 (0.5%). Solvency II provides additional protection through the governance requirements that it puts in place, ensuring that company Boards have a proper understanding of the risks to which they are exposed.
You can find out more information about Solvency II from the European Commission, EIOPA (the pan-European insurance regulatory authority) and the PRA.