The implementation of the Solvency II Directive into Irish law on the 1 January 2016 is a major development for the Irish insurance industry. (Re)insurance firms operating in Ireland are now facing change on an unprecedented scale.

The Solvency II Directive (2009/138/EC) (as amended) (“Solvency II”) provides the framework for a new EU solvency and supervisory regime for the insurance sector. Ireland transposed Solvency II on 4 November 2015 by way of the European Union (Insurance and Reinsurance) Regulations1 which took effect on 1 January 2016.

Solvency II creates a fully harmonised regime for the prudential regulation of (re)insurers based across the EU and it applies to those in both the life and non-life insurance sectors.

The new regime brings a risk-based approach to the supervision of (re)insurers with the aim of increasing policyholder protection.

Three pillars

The Solvency II regime is based on a three pillar approach to the supervision of (re)insurers similar to the regime of Basel III as developed by the Basel Committee on Banking Supervision.

The three pillars which each govern a different aspect of the Solvency II regime are set out below:

  • Pillar 1 deals with the adequacy of assets, technical provisions and the capital of a (re)insurer. Under this pillar, (re)insurers must be able to demonstrate that they have adequate financial resources to satisfy Solvency II capital requirements.
  • Pillar 2 covers governance and risk management requirements and supervisory review. Under this pillar, a (re)insurer is required to prepare an Own Risk Solvency Assessment (“ORSA”) identifying risks in their business and the capital needed to manage those risks.
  • Pillar 3 contains public reporting and disclosure requirements. (Re)insurers must disclose more detailed information to the Central Bank of Ireland (the “Central Bank”) than was required under the previous Solvency I regime.

Irish perspective

The Solvency II regime has established new capital requirements, valuation techniques, governance and reporting requirements for (re)insurers and has also provided the Central Bank with increased supervisory responsibilities.

The Central Bank stated in its December edition of the Solvency II Newsletter that the reporting requirements that emanate from the implementation of Solvency II will remain a challenge for (re)insurers in 2016 and advised (re)insurers who are subject to the new regime to make regulatory reporting a priority to ensure that they are ready for their first submissions in May 2016.

The Central Bank will run an industry workshop on 23 February 2016 to provide guidance to (re)insurers on Solvency II reporting requirements (EIOPA QRT’s, Insurance and Statistical NST’s, ECB Add-On’s etc).

The new Solvency II regime fundamentally reforms for (re)insurers their respective capital requirements, corporate governance, risk management, reporting and prudential standards.