Solvency II or 2

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The insurance industry will soon implement Solvency II2 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 cirics who argues that the system didn't identify the real risks and that insurance firms may be different depeding 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 Comite Europeen Des Assurances summarising how Solvency 2 should develop. Parts of the development included a 3 pillar approach much like Basel II for Banks.

Solvency II implementation is most likely to be in 2007.

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.