Solvency II requires insurers to provide deeper levels of reporting, risk disclosures, data granularity, and security characteristics than ever before. From refining data requirements, fine-tuning staff responsibilities, and monitoring EIOPA regulation changes, the path to Solvency II success is complex and requires careful navigation.
In our Solvency II Hub, you’ll find resources to help you navigate the changing requirements of Solvency II and content that provides you all you need to know to make sure you’re operationally ready.
Solvency II is a comprehensive regulatory framework for the European insurance industry. It was implemented to both ensure the financial stability of insurance companies and protect policyholders.
Coming into effect on 01 January 2016, Solvency II replaced the previous Solvency I regime. Solvency II is designed to foster a culture of risk awareness and prudent financial management. Financial entities must have a comprehensive understanding of the risks they face, whether in their underwriting activities or their investment portfolios.
Insurers need sufficient capital to meet their long-term obligations to policyholders and beneficiaries. This more risk-averse approach typically leads to a shift in business models and new insurance products that are likely to have lower guaranteed returns and higher risk premiums. Insurers will also be more inclined to offer products linked to capital markets.
One of the key challenges for insurers and asset managers is to balance capital efficiency with compliance. Insurers need to hold enough capital to meet their Solvency II requirements, but they also need to be efficient with their capital so that they can generate a return for their shareholders.
The UK government began investigating an alternative to Solvency II to tailor regulatory requirements to the specific needs of the UK insurance market. This was, in part, due to the United Kingdom’s exit from the European Union, which allowed the possibility of moving away from EU prudential regulatory standards.
The goals of the Solvency UK regulations were centred on fostering innovation, reducing regulatory burdens as well enhancing overall competitiveness of the UK insurance industry.
Solvency UK is designed to be more flexible than Solvency II through its principle-based frameworks. This will allow insurers to use their own internal models for calculating capital requirements. This should make it easier for insurers to develop new and innovative products and services.
It is also designed to be better suited to the smaller and specialised insurance companies found in the UK compared to the EU.
Regular updates to the Solvency II Delegated Regulation are published by the European Insurance and Occupational Pensions Authority (EIOPA). These updates are designed to clarify and improve the Solvency II regime.
In recent years, these updates have included information on:
To understand the impact of Solvency II, it is essential to look at the three pillars that underlie this directive.
These are the capital requirements that insurers must hold. These requirements are based on the insurer’s risk profile, which is assessed using a variety of factors such as assets and liabilities, underwriting practices, and risk management systems.
The Minimum Capital Requirement (MCR) cannot fall below 25% or exceed 45% of an insurer’s SCR and is calculated as a linear function of certain variables. The SCR represents the capital needed to cover risks, while the MCR is the minimum threshold for maintaining operations.
The Solvency Capital Requirement (SCR) can be calculated either with a standard model or an internal model if regulatory approval is granted. The standard model is a simplified approach most suitable for smaller or less complex insurance companies. As it is a standard calculation, there may be some concern that an insurance provider’s true risk profile is not adequately captured.
A larger or more complex insurer may choose to develop their own model to calculate SCR to have a more tailored assessment of risk and capital needs. This will result in a more accurate risk profile, but will require a potentially large investment in data, technology, and expertise.
This pillar requires insurers to have a robust system for identifying, assessing, and managing their risks. It also outlines the need for effective supervision for insurers. As part of this pillar, insurers may be subject to audits and reviews. To be best prepared for they should ensure that they:
Insurers are required to disclose a wide range of information to policyholders, beneficiaries, and supervisors. This is to ensure that stakeholders understand the insurer’s financial position and risk profile. This level of transparency is intended to impart a greater level of discipline throughout the insurance industry.
It is also possible to view these disclosure requirements as a competitive advantage as it aids in building trust and confidence in the market. An insurer can highlight their effective risk management policies and governance structures to showcase their commitment to safety and prudence.
As per the requirements of Solvency II, insurers will need to communicate and make a large amount of information accessible to stakeholders. It’s best to have a considered and careful approach to this. The points you may want to consider when building your communication strategy may include:
The extensive reporting requirements required by Solvency II are vital for regulators, stakeholders, and policyholders to assess an insurer’s financial stability and risk profile. Insurers must use a market-consistent approach to value their assets and liabilities. This includes regular reporting on the valuation of investments and the calculation of technical provisions.
For UK insurance firms, the PRA’s National Specific Templates (NSTs) are a set of regulatory reporting templates that supplement the Solvency II annual and quarterly reporting requirements. They collect additional information that is specific to the UK market and supervisory approach. This can include data on business models, risk management, and governance. The purpose of these is to help the PRA to assess the financial strength and risk profile of UK insurance firms and, consequently, tailor its supervision accordingly.
This report needs to be prepared annually and provides a comprehensive overview of the insurer’s business, governance, risk profile, and financial position. It should include information on the company’s risk management framework, capital adequacy, and solvency ratios. Summaries of the SFCR will be provided to policyholders and the public, this will give insights into an insurer’s financial health and risk management practices.
These are a series of regular quantitative reports that insurers must submit to their supervisory authorities. These reports provide detailed data on an insurer’s assets, liabilities, and capital adequacy. The frequency of these reports varies, with some submitted quarterly, semi-annually, or annually.
This assessment is for insurers to establish their overall solvency needs. It will cover how an insurer manages and mitigates risks, provides insights into their risk appetite, and demonstrates their ability to meet their obligations to policyholders. This report is a critical part of Solvency II’s risk management framework.
These are a set of standardised templates that insurers can use to report quantitative data. They cover a wide range of areas, including technical provisions, own funds, and solvency capital requirements. Insurers must complete and submit these templates on a regular basis.
Insurers are expected to conduct stress and scenario tests to assess the impact of adverse situations on their solvency position. The results of these tests must be reported to supervisory authorities.
The Tri-Partite Template (TPT) is an industry developed template that specifically pertains to asset managers and other service providers that support insurers. It’s designed to facilitate information flow between insurers, asset managers, and custodians.
The TPT takes the form of a standardised reporting template that asset managers and custodians use to provide insurers with information about the assets they manage on behalf of insurance companies. It will typically include detailed data on the assets and investments managed by the asset manager for the insurer. This data may cover a wide range of asset classes, such as equities, fixed income securities, alternative investments, and more. The goal is to capture information regarding the nature, quality, and risk profile of the assets held by insurers.
The frequency of TPT reports is usually determined by regulatory authorities or by the contractual agreements between insurers and asset managers. Depending on the agreement or authority, reports may be submitted quarterly or annually, and should reflect the assets under management during the specified reporting period.
Technology has a pivotal role to play in facilitating Solvency II due to its complexity and data-intensive nature. It is crucial for insurers in providing for efficient management and reporting.
As Solvency II mandates the collection, validation, and integration of vast amounts of data from diverse sources, sophisticated technological solutions can greatly streamline the process by automating data collection, ensuring data accuracy, and centralising data sources.
Some other ways that technology can assist, and impact Solvency II include:
Many insurers are adopting new technologies and upgrading their systems to assist them with meeting Solvency II requirements. By automating and streamlining compliance processes, technology not only enhances efficiency but also improves risk management and decision-making. In a data-rich world, it’s never been more important for insurers to have robust technological solutions to have full control and scope of their risk profile.
As can be seen by the frequency of updates in the Solvency II timeline, relevant regulation and governmental bodies are constantly reviewing the Solvency II framework and considering reforms to make the regulations more robust.
General trends suggest that the Solvency II framework is likely to become more complex and demanding in the future. Insurers should start preparing for these changes now by investing in their compliance capabilities and by reviewing their risk management systems.
Regulators are increasingly focused on systemic risk, which is the risk of a failure in one part of the financial system leading to a failure in other parts of the system.
There is a greater emphasis on ensuring that insurance companies are financially sound. This is likely to lead to stricter capital requirements and other measures to reduce the risk of insurance company failures.
The European Commission is considering how to align Solvency II with other international regulatory frameworks, such as IFRS 9.
Making the Solvency II framework more user-friendly for insurers as well as more flexible so it can be tailored to their specific needs.
For there to be better capital allocation based on the characteristics or risk profile of the assets.
The Solvency II directive has revolutionised how insurers manage their data. For most firms, it’s the first time they’ve had to closely consider the details of refined data quality. The regulations are so complex that even as the implementation deadline has come and gone, insurers are still testing their Solvency II capabilities and finding unexpected challenges.
Clearwater Analytics provides insurers worldwide with the highest level of investment portfolio transparency and control, regardless of their number of legal entities, investment managers, data points, or custody banks.
Clearwater’s web-based, multi-basis investment accounting solution includes general ledger entry file integration; investment policy guideline monitoring; portfolio risk and performance analytics; and regulatory reporting. The daily reconciliation of accounting data, along with the integration of third-party data, ensures accuracy, consistency, and transparency across all Clearwater reports.
Our dedicated client services team has extensive experience with the intricacies of the EU insurance industry. We act as an extension of clients’ teams to provide vital insight and customised support to help overcome the complexities and challenges of Solvency II.
The time-consuming processes of reviewing updates and researching best practices take employees away from more critical tasks. In-depth knowledge of Solvency II challenges and best practices allows us to proactively develop functionality that solves pervasive industry challenges, deployed automatically and seamlessly to our clients.
Clearwater’s web-based solution requires no software installations at any point. It features continuous product enhancements that enable organisations to seamlessly respond to technological and regulatory changes, with no additional burden on employees.
Solvency II is a comprehensive regulatory framework for the insurance and reinsurance industry in the European Union. It sets out prudential requirements and risk management standards to ensure the financial stability and soundness of insurance companies.
Solvency II compliance is mandatory for:
Compliance with Solvency II is crucial to ensure the financial stability, risk management, and regulatory adherence of entities operating in the EU insurance sector.
Solvency II is built on three pillars:
While IFRS 17 and Solvency II serve different purposes, there is some overlap in the data and information used for compliance with both frameworks. Essentially, one is a regulatory regime and the other is an accounting standard. Insurance companies may use the same data for calculating provisions under IFRS 17 and for assessing capital requirements under Solvency II.
Solvency II is a more comprehensive framework than IFRS 17 as it covers a wider range of issues, including risk management, governance, and capital adequacy. IFRS 17 is specifically focused on accounting for insurance contracts.
Another key difference between Solvency II and IFRS 17 is the approach to valuation. Solvency II requires insurance companies to value their assets and liabilities at fair value. IFRS 17 requires insurance companies to value their insurance contracts at risk-adjusted fair value. This means that IFRS 17 considers the riskiness of insurance contracts when valuing them.
The Solvency Capital Requirement (SCR) represents the amount of regulatory capital an insurer is required to hold to cover its risks. It is calculated based on the insurer’s risk profile, considering various risk factors.
The Minimum Capital Requirement (MCR) represents the minimum amount of capital an insurer must maintain to continue its operations. It is designed to ensure that insurers always have a minimum level of capital to meet their obligations.
Solvency II requires insurers to adopt a more risk-aware approach, leading to a shift in business models, product portfolios, and investment strategies. Insurers must develop more risk-adequate products, align their investments with liabilities, and prioritise capital efficiency while maintaining regulatory compliance.
Solvency II regulatory authorities are increasingly focusing on climate and sustainability risks. There is a growing emphasis on the integration of environmental, social, and governance (ESG) factors into risk assessments and reporting to address these emerging risks.
Technology plays a crucial role in Solvency II compliance, enabling efficient data management, risk modelling, regulatory reporting, and automation of compliance processes. It also makes use of advanced analytics, which help insurers assess and manage risks more effectively.