The overarching objective of Solvency II is to bring about a fundamental change to the solvency and risk management standards for the European insurance industry, with the intention of significantly strengthening the prudential standards to which European insurers adhere. The consequence of these improvements should be a significant reduction in the probability of firm failures and a resultant significant improvement in policy-holder protection.
 

The key specific benefits of Solvency II are:
 

• Improved risk sensitivity – Solvency II emphasises the importance of risk‑based regulatory requirements. The adoption of this framework should encourage firms to understand better the risks they run, and thus increase the resilience of both firms and the industry as a whole.
 

• Improved market sensitivity – Solvency II aims to embed a market-sensitive approach to the regulation of insurance across the EU. For firms that go down the internal model route, this will involve more timely and more precise market sensitivity than under the current UK Individual Capital Adequacy Standards regime. This should, therefore, enhance the UK financial system by ensuring that insurers’ regulatory capital requirements more accurately reflect up-to-date market conditions. "I should nevertheless remind you that models have their limitations, as at the end of the day they are dependent on their data.  This point is a good moment to remind us all that when it comes to risk management there is no substitute for good common sense.  It is vital to ensure the substance of the models can be understood by all key members of management including the board."
 

• Improved supervision of groups – in a significant enhancement to the current regime, Solvency II makes specific allowances for the supervision of groups, a reflection of the growing interconnectedness of the UK insurance market and financial system as a whole.
 

• Improved transparency – Solvency II requires consistent data disclosures by firms across Europe. This should facilitate better peer analysis on a pan‑European basis and generally raise the level of understanding by investors and users of the European insurance industry. 
 

• Common EU intervention tools – Solvency II creates a codified ladder of intervention across the EU which will help group supervisors quickly and effectively act in times of firm-specific or systemic stress.
 

• Reduced cross-subsidisation – as insurance regulation is currently not harmonised across the EU, there is the potential for differing regulatory regimes to place different financial requirements on very similar products, favouring some firms and disadvantaging others. By moving to a harmonised risk-based approach, Solvency II should align regulatory requirements with the underlying economics and risks of individual products. This will provide a level playing field across the EU for firms to compete on across the EU and consequently encourage competition. As the UK has already begun this move towards risk‑based regulation, with the implementation of the current ICAS regime, UK firms should be well placed to take advantage of this levelling of the EU playing field.
 

• Rationalisation of the existing regime – Solvency II will sweep away the complexity of the current UK regime based on Solvency I and supplemented with super equivalent requirements including the ICAS regime.