Solvency II is a 155-page fundamental review of the capital adequacy regime for the European insurance industry.
It aims to establish a revised set of European Union-wide capital requirements and risk management standards that will replace the current solvency requirements.
While there has been talks of postponing these capital requirements coming into force, in June 2011 the FSA stated it continued to work on the assumption the implementation date was 1 January 2013.
* The main objective of supervision is “the protection of policyholders and beneficiaries”, although member states must also ensure supervisory authorities shall consider the potential impact of their decisions on the stability of the European Union’s financial systems.
* Conditions an insurer must meet if it establishes a branch in another member state or pursues business in another member state under the freedom to provide services are set out.
* Pillar one of Solvency II defines two capital requirements:
1) The Solvency Capital Requirement (SCR) is the target level of capital under normal circumstances.
The calculation of the solvency capital requirement is based on a value at risk (Var) measure, where the probability of results being worse than expected over a holding period of one-year may not lead to a bankruptcy of the insurance company at a confidence level of 99.5 per cent.
2) The minimum capital requirement (MCR) indicates an absolute minimum level of capital.
To read more about the capital requirements for insurers click here.