Solvency II - Aligning Risk And Capital Management

Author:Mr Andrew Bates and Sinéad O'Loghlin
Profession:Dillon Eustace

Solvency II will introduce economic risk-based solvency requirements for (re)insurance undertakings which will ensure that risk is measured on consistent principles and that capital requirements are aligned with the underlying risks of the undertaking concerned.

The new rules will introduce a two tier capital requirement for (re)insurance undertakings which seek to ensure the financial soundness of undertakings and to protect policyholders.

The rationale behind the introduction of this two tier capital requirement is to provide supervisory authorities with a so called "supervisory ladder of intervention" which will enable regulators to act in a timely, pre-emptive and effective manner to ensure the continued financial soundness of a (re)insurance undertaking.

The "supervisory ladder of intervention" also aims to ensure that any supervisory action undertaken is customised to the specific scenario affecting the undertaking concerned. This marks a fundamental change from the existing regulatory framework in Ireland.

Solvency II - Ireland's Regulatory Framework

The Irish Government is currently in the process of transposing into Irish law the Solvency II Directive (Directive 2009/138/EC) as amended by the Omnibus II Directive (Directive 2014/51/EC) which will become effective across all twenty eight EU Member States from 1 January 2016.

In Ireland, the Solvency II regime will be given legal effect by secondary legislation in the form of Statutory Instrument. The Solvency II Directive will also be supplemented by more detailed technical Commission Level 2 measures and they in turn will be supplemented by Level 3 guidance for national supervisors developed and adopted by the European Insurance and Occupational Pensions Authority (EIOPA).

A New Prudential Supervisory Approach

Solvency II provides for a risk sensitive supervisory regime which is based on a prospective calculation of an (re)insurance undertaking's Solvency Capital Requirement ("SCR") and Minimum Capital Requirement ("MCR") with the aim of protecting policyholders and ensuring the financial soundness of (re)insurance undertakings.

The SCR of an (re)insurance undertaking should reflect a level of eligible own funds that enables re(insurance) undertakings to absorb significant losses and that gives reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due. The SCR should cover all risks that an undertaking faces and should also take full...

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