Solvency II finally and irrevocably goes into effect on January 1, 2016 after more than a decade of extensive discussion and testing, and many insurers are feeling substantial pressure. The clock is ticking as they prepare to comply with new regulations affecting the way they model and calculate their balance sheet as well as their operations. The focus, however, cannot be on just being ready on January 1, but on having an effective plan for deploying capital long term.
First of all new modelling and calculating procedures have been developed for setting up a market-consistent Solvency II balance sheet, and these need to be stressed according to Solvency II shock scenarios in order to achieve the company’s solvency capital requirement (SCR). In addition to the quantitative requirements, many operational changes must be implemented to ensure full compliance with the finalized standards and guidelines at launch. This has been quite challenging, as many of the regulation’s technical details and implementation elements have been negotiated and were only finalized at a very late date. For example, it was scarcely a year before Solvency II was to go into effect that long-term guarantee measures were included in the regulatory framework, affecting transitional measures on risk-free interest rates or on technical provisions, volatility adjustment and matching adjustment.
In these few months companies needed to assess which of these measures were most appropriate for each company’s individual situation. Based on this decision, they then had to send application forms to their regulator for supervisory approval. Companies intending to use an internal model are having an intensive dialogue with their regulator to get this approved. In most cases approval for their internal model is not expected before the end of a six-month approval process — just in time to be used when required through the introduction of Solvency II.
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