Launch of Solvency II and its implications for (re)insurance companies
The start of 2016 sees the launch of Solvency II by EIOPA, which will harmonize regulatory legislation across the European Union. If your head office is in the EU you will probably be required to prepare and submit a Solvency II report by May 2016. Here we guide you through the basic requirements.
The overall structure of the Solvency II framework is based on three pillars.
- Pillar 1: This covers all quantitative aspects and requirements, such as measurement of assets, liabilities and capital. The main tasks are the minimum capital requirements (MCR) and solvency capital requirements (SCR).
- Pillar 2: This covers the more qualitative aspects of risk assessment. Insurers must submit assessments of risk and capital adequacy (ORSA) and also furnish details of corporate and risk governance, internal systems and controls.
- Pillar 3: This is the most important pillar as it covers all reporting requirements. Insurers must report publicly to their respective National Competent Authorities. The reports include extensive quantitative reporting requirements in the form of QRTs (Quantitative Reporting Templates).
Every (re)insurer must file two kinds of report.
- Regular Supervisory Report (RSR): This contains qualitative and narrative information related to the risk and governance policies of the company, and needs to be filed with the Supervisor.
- Solvency and Financial Condition Report (SFCR): This is the report that can be disclosed to the public and it must be published annually by groups and individual statutory entities.
The QRTs are templates for quantitative analysis and they form part of both the RSR and SFCR. Some of the reports are required on a quarterly basis, and some on an annual basis. They include the most common financial statements, lists of assets and analysis of available capital and own funds. They also need a detailed analysis of the capital requirements for the Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR). There are different templates for reporting for individual companies and at group level.
Adherence to Solvency II guidelines is intended to ensure financial stability and enhance consumer protection in the insurance market.
The supervisory framework and reporting requirements are stringent, and introduce a paradigm shift in the risk culture of companies. Adherence involves calculation of a wide range of quantitative values and preparation of several different reports, which may be a time-consuming task for insurance companies. You may have to make some improvements to your financial systems so that they comply with Pillar 3 reporting requirements. On a positive note, meeting the new requirements for external reporting will also help ensure you have complete, reliable and consistent data for internal risk assessment and capital management purposes.
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