The Solvency II regulations, which will govern the amount of capital an insurer must hold to avoid insolvency, will come into effect on 1 January 2016 and will apply globally to companies and groups with headquarters in all 27 European Union countries plus Norway, Liechtenstein and Iceland that will be implementing
The regime’s requirements are segmented into three pillars: Pillar I, which contains the quantitative rules for calculating target capital; Pillar II, the detailed qualitative risk management and supervision requirements; and Pillar III, the technical reports needed to fulfil its disclosure and transparency requirements.
Companies are currently under substantial pressure to implement many changes to operations to ensure full compliance with the finalised standards and guidelines at the regime’s launch. This is quite challenging, as many of the regulation’s technical details and implementation elements are still being negotiated and finalised.
ChallengesThe requirements of Solvency II’s pillars are already putting new pressures on Europe-domiciled insurers – pressures to change operations and procedures to comply with the new disclosure and reporting requirements.
The main challenge so far is cost: implementation costs for many companies have already far exceeded what most had budgeted, in part due to the many changes in the regulation over the years.
Companies that have developed their own internal models as an alternative to using Solvency II’s standard formula are also encountering challenges, as they must obtain the approval of the local supervisor – a comprehensive and lengthy process with massive documentation requirements.
The many new requirements are also challenging for mid-size and smaller insurers. This is ironic, as one of regime’s aims was to make compliance less comprehensive and burdensome for smaller companies.
The many postponements of Solvency II’s introduction have been a challenge for supervisors as well, as many essential aspects are only now being defined. Several are also still under discussion, which is further squeezing the implementation timelines for affected companies.
Another challenge has been how companies can best arrive at market-consistent valuations of best-estimate liabilities. Given the ongoing global low interest rate environment of the past seven years, these valuations are introducing new and significant volatility into insurer solvency.
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