Solvency II

1. Overview

The European Commission’s Solvency II Project is devoted to extending the current solvency rules for life and non-life insurers and reinsurers (Solvency I).

Solvency II covers a much broader spectrum than Solvency I, since one of the intentions of the new solvency requirements is to take account of present developments in the field of risk management and investment management, and of modelling approaches used in financing and actuarial mathematics.

The objectives of Solvency II

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  To continue the harmonisation process within the financial services sector
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  To provide as far as possible for a level playing field within the EU
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  To ensure efficient supervision
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  To depict the actual risk situation of insurance companies comprehensively and realistically
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  To create incentives to develop internal models for measuring the risk situation within insurance companies

2. Structure and timetable

Solvency II follows the three-pillar approach used in Basel II.

Pillar 1 deals primarily with quantitative aspects:

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  Definition of solvency capital requirements (SCR) and minimum capital requirements (MCR)
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  Bases for preparing the solvency balance sheet (including the recognition of technical provisions) and thus for calculating capital
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  Determining eligible capital elements

Solvency II envisages allowing not only standard approaches but also internal models as a basis for determining the SCR. It is expected that risk capital requirements calculated using individual models will be lower than requirements determined using the standard approach.

Pillar 2 is concerned with the supervisory review process. To this end, fit-and-proper criteria (governance system) are being defined, the supervisory review process described, and the framework for supervisory intervention established.

A key element of the governance system is the implementation of a risk management system involving the areas of risk assumption and reserving, asset-liability management, investment management, liquidity and risk concentration management, and reinsurance and other risk minimisation methods. Minimum Requirements for Risk Management in insurance companies ("MaRisk") are currently being developed in Germany in anticipation of Solvency II.

Finally, Pillar 3 describes the disclosure rules. These requirements are aimed at enhancing market transparency and market discipline.

The Solvency II project is divided into two phases. In the first phase (May 2001 to April 2003), detailed analyses of the current situation were carried out, discussions held on possible bases, principles and concepts of the future system, and the outlines of future solvency supervision established.

In the second phase, which began in December 2003, the details of the new solvency system have been elaborated.

A proposal by the European Commission for a directive was submitted on 10 July 2007. It concerns "the taking up and pursuit of the business of insurance and reinsurance". The title itself already illustrates that the proposal does not (newly) regulate solvency alone. Rather, it codifies and recasts 13 existing directives concerning the supervision of insurance companies into one coherent text supplemented by the Solvency II elements.

If all goes according to plan, the European Parliament and Council will adopt the directive next year. It is anticipated that the directive will enter into force in 2012.

3. The role of Munich Re

Munich Re is involved in shaping the legislative process regarding Solvency II through a number of channels at both national and international level. These include German Insurance Association committees and actuarial bodies, BaFin (the Federal Financial Supervisory Authority) and CEIOPS.

At Munich Re itself, special working groups are looking at the implications of the new solvency system for our own business and that of our clients.