Solvency II 1 is the new prudential framework for insurance companies that should be implemented by 2013. The existing European regulatory regime is over 30 years old. Many countries have adopted additional requirements, resulting in a patchwork of different regulations across Europe. Solvency II is intended to harmonise insurance regulation to establish a level playing field and provide consumers with equal protection across the EU.
Solvency II is based on three pillars: (1) qualitative requirements, (2) quantitative requirements and supervision, and (3) public disclosure. It introduces market valuation of assets and liabilities and risk-based capital requirements. Solvency II imposes the so-called solvency capital requirement (SCR), which reduces the probability of insolvency within one year to 0.5 percent. To establish their SCR, insurers may employ the standard model or an internal model approved by the supervisor.
Insurance companies play an important role by affording people the flexibility to top-up collective retirement provision under the first and second pillar. But insurers also administer occupational pension plans. The adoption of Solvency II marks a major step forward in improving the protection of policy-holders in this area.
The contribution of EFRP to the Solvency II debate is primarily aimed at preventing an inappropriate extension of this regime to pension funds. Solvency II was specifically designed for insurance companies and is unsuitable as a regulatory regime for pension funds. Pension funds are different from insurers and – just like banks, investment funds and investment firms – require a different regulatory approach.
See also:
EFRP Response – European Commission Consultative Document – Ares(08) 14767 – Executive summary – November 2008
EFRP Paper – Funding and Solvency Principles for IORPs – May 2008
1 Directive on the taking-up and pursuit of the business of Insurance and Reinsurance, Solvency II
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