Originally published in Actuarial Post, 7th Jun 2011
The publication on 17 December, 2009 of Directive 2009/138/EC ("Solvency II") was the first step in a process to strengthen the supervision and prudential regulation of insurance and reinsurance companies. Effective in EU Member States from 1 January, 2013, Solvency II is built on a three pillar structure which seeks to ensure that insurance undertakings will have adequate financial resources (Pillar 1), effective governance (Pillar 2) and increased market discipline through disclosure requirements (Pillar 3).
This piece will explore the impact of Solvency II Pillar 2 on insurers and reinsurers, in particular corporate governance, the principles for internal control and risk management, the requirement to prepare an Own Risk and Solvency Assessment ("ORSA") and capital add-ons; and
It will also address the Corporate Governance Code for Credit Institutions and Insurance Undertakings (the 'Code') published by the Central Bank of Ireland ('CBor) in November 2010, which specifies the minimum requirements on credit institutions and insurance undertakings (life and non-life) to organise the governance of their institutions.
System of Governance
Article 41 of Solvency II requires that insurance undertakings establish an effective system, subject to regular review, of governance to ensure sound and prudent business management proportionate to the nature, scale and complexity of the undertaking's operations.
The governance system required under Solvency II must include:
an adequate and transparent organisational structure with clear allocation and segregation of responsibilities and an effective system for ensuring the transmission of information. Written and i mplemented policies and procedures for, at a minimum, risk management, internal control, internal audit and outsourcing. The policies and procedures (which will be subject to prior approval by the CBoI) must be reviewed at least annually, or more often if there is a material change.
Fitness and Probity Regime
Solvency II requires that persons who effectively run insurers and who are involved in key functions must be fit and proper and of good repute.
The CBoI introduced its Fitness and Probity regime in 2007 requiring Individual Questionnaires to be completed and submitted to the CBoI for all directors and for all managers who report directly to the board or to the chief executive as part of the CBoI's due diligence...