20 June 2011

Commission expects Solvency II to begin in 2013

The new European Regulatory regime for the Insurance Industry, Solvency II, which is similar to Basel II for banks, will be published in the autumn of this year and is expected to kick off in the New Year.

Solvency II is a new European regulatory regime for insurers, which will fundamentally change the capital requirements of the insurance industry and introduce a new form of risk management in the supervision of insurers. By promoting more sophisticated approaches, including firm-specific internal capital models, Solvency II will ensure a more accurate allocation of capital to risk.

Furthermore, the goals of the new risk-based regulation are:

1. To help protecting policyholder interests and the stability of the financial system as a whole more effectively by making firm failure less likely;
2. to increase efficiency in the use of capital, improving returns;
3. to achieve a more efficiently priced market for insurance products and make it easier for firms to do business across the EU.  



The current Solvency I regime was introduced in the early 1970s and defines capital requirements by specifying simple blanket solvency margins. Volatility and uncertainty in the estimated value of liabilities is addressed in a fragmented way using broad assumptions that often do not reflect the underlying risk. This simplistic design means that Solvency I lacks risk sensitivity and does not capture a number of key risks, including market, credit and operational risk. Furthermore, it does not ensure accurate and timely intervention by supervisors, nor does it facilitate optimal allocation of capital.

The European Commission is currently working with a number of stakeholders, including the ABI, on the Level 2 draft implementing measures. Whereas, a final text is not expected before late summer 2012, the Commission has indicated that a ‘near final’ text will be published in autumn this year.

According to current proposals, the starting date of the new regulatory framework is expected to be on 1 January 2013.

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