The insurance industry are to implement Solvency II and this will attempt
to link the regulatory capital required, sometimes known as the reserving
requirements, to the risk the firm faces. These initiative are a result
of work by the EU who have issued the rules of the process.
The current EU Solvency system has so far has been able to achieve a reasonable
level of of reserve capital is held, but there are critics who argues
that the system didn't identify the real risks and that insurance firms
may be different depending on their profile, so they should not be treated
the same. This is where Solvency II will alter the landscape and the project
was launched at the end of the year 2000. In August 2002 a paper was released
by the Committee Europeen Des Assurances summarizing how Solvency 2 should
develop. Parts of the development included a 3 pillar approach much like
Basel II for Banks.
Solvency II implementation was meant to be in 2007 but now looks as if
it will be in 2012.
Firms will have to work on interpreting the requirements of Solvency
II and implement a more sophisticated approach to risk management.
Internal models will have to be enhanced and all the assumptions will
have to be reported to the relevant regulators. Actuarial models in systems
such as
MoSeS or Prophet will have to be have to be altered and tested in time
for the Solvency II introduction.
For firms in the UK, Solvency II will be included in the soon to be released
Integrated Prudential Sourcebook which will set out the requirements for
Insurers including the 'twin peak' approach to reserving requirements.
The FSA in the UK has released its most current document which is the
'near final' rules of the sourcebook. In this text it specifies that Solvency
II is a part of the LTICR Long Term Insurance Capital Requirements component.
