Solvency IIInterpreting the key principles

ContentsIntroduction 2

Pillar I: solvency capital requirements 5

Pillar II: general regulatory principles 7

Pillar III: financial disclosure and solvency 9

Conclusion 9

IntroductionNow that the European Commission has endorsed the basic architecture for Solvency II, we believe it is important to

in the proposed directive issued by the European Commission on July

Parliament and the Council of the European Union recasts the current 13 Solvency (re)insurance directives into one, with plans

share the proposed implementation measures that the European

and standards will come from the Committee of European

2 Solvency II key principles

The three pillar structure for Solvency II is the insurance industry’s equivalent of bank regulation under Basel II. It addresses risk from the perspective of quantitative requirements, supervisory process, market transparency and disclosure.

3Solvency II key principles

Assets covering technical provisions,

the MCR and the SCR

Solvency capital requirement

Minimum capital requirement

Risk margin(for non hedgeable risk components)

Best estimate

Technical provisions

Market-consistent valuation for hedgeable risk components

as

se

ts

Overview of Solvency II

4 Solvency II key principles

Pillar I: solvency capital requirements

both solvency capital requirements (SCR) and minimum capital

Insurance and reinsurance entities have a responsibility to inform

Standard formula

Full internal model

Validation criteria

Use test

Statistical quality standards

Calibration standards

Profit and loss attribution

Validation standards

Documentation standards

Validation process

Companies submit documentary evidence that the internal model

the company provides the supervisor with an estimate of its SCR,

Partial internal model

Determination of own funds

5Solvency II key principles

Mkt prop

Mkt int

Mkt eq

Mkt sp

Health exp

Health xs

Health ac

= Adjustments concerning the ability to absorb losses via policy bonuses

Life lapse

Life exp

Life dis

Life mort

Life long

Life cat

Life morbMkt cone

SCR

SCRop

SCR nl SCRmkt SCRhealth SCR def SCRlife

NLprem

NL cat

Mkt fx

BSCR

ancillary own funds (other items that may absorb losses under

permanence, their ability to absorb losses, their subordination, their

Minimum capital requirement (MCR)Principles

Have an absolute floor of €1,000,000 for non-life (re)insurance

the results of that calculation to supervisory authorities on at least a

Investment rules “Prudent person” principle

Assets will be invested to ensure the security, quality, liquidity and

technical provisions will be invested in a manner appropriate to the

Solvency capital requirement

6 Solvency II key principles

Pillar II: general regulatory principles

Appropriate internal controls – understood and applied by

An actuarial function to coordinate the calculation of technical

SupervisionThe process

Compliance with the qualitative and quantitative standards when a

The power of regulators

7Solvency II key principles

SC

R

MC

R

SC

R

Pillar 1

Ad

just

ed

SC

R

Pillar 2

-+

+Allowance fornot quantified risk,

supervisory views andany deficiency of the

risk managementand internal control

framework

– Reduction due toexplicit quantification

of diversification,risk exposure, etc.

Potentiallysimilar to

Solvency IInternalmodel

Standardapproach

Supervisorintervention zone

regardingcapital requirements

Other risks include group risk,strategic risk, corporate governance, etc.

Underwriting, market, credit, liquidity, operational risk

Interactions between Pillar I and Pillar II

8 Solvency II key principles

Group supervision

Group solvency should be calculated, as a preferred approach, on

method would be accepted by the supervisor as an alternative

Pillar III:and solvency

An overview of the business and its performance: description of the

Valuation method: technical provisions, assets held to cover the technical provisions and capital requirements, as well as other assets

Own funds: description of the structure, quality, and amount of own

Internal model potentially used by the company: description of the

Conclusion

view this timeframe as an opportunity for insurance companies

website that provides up-to-date information on the proposed

www.ey.com/solvencyii.

9Solvency II key principles

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