After seven years of deliberation, the Solvency II EU directive was approved in May 2009. The directive has to be transposed to local legislation by 31 December 2012. The director of the Internal Market Insurance Unit stated that it was a “miracle” the directive was finally approved this year, possibly because of the current economic situation.
The main objective of Solvency II is to modernise current insurance rules. Solvency I has been in place for over 30 years and needed to be updated, as it does not respond to new risks that insurers encounter nowadays. The new legislation is, to the insurance market, what Basel II was for the banking sector.
There are three main aspects that will be improved by the directive:
- Protection of the insured
- Insurer efficiency
- Market transparency.
The three pillars
To accomplish its objectives, the directive is based upon three pillars:
The quantitative pillar regulates the capital an insurer needs to face unforeseen situations. The regulation does not raise the capital requirement, but it tries to adapt these requirements according to each insurer’s needs. Generic capital requirements are no longer used; this directive is a step towards a personalised model that allows the companies to have improved risk management processes, adjusting their reserves to each particular case.
- Supervisor review
The intention of the supervisor review pillar is to improve the management of insurers trying to focus on corporate responsibility and seeking the self-regulation of the sector. Insurers will have to submit their own management plans that will be subject to the supervision of the local authorities.
The disclosure requirements pillar seeks to reinforce transparency by improving the quality and amount of information insurers will have to provide to clients and local supervisors.
The implementation of these three requirements will be difficult. That is why 30 of the top European insurance companies will have to face a stress test during 2010 to check their solvency levels.
It is expected that one of the effects Solvency II will have on the insurance sector is higher market concentration, because some smaller insurers will not reach the new solvency requirements and could be bought by larger insurers or forced to merge with other companies. In Spain, 300 insurance companies operate in the non-life sector. However, it is controlled by 15 companies that have a 63% share of the market.
Local supervisors are strengthened by this directive, which also tries to encourage collaboration between insurers and local supervisors. However, the main objective of Solvency II is to improve the internal management of insurers, making supervision easier for local regulators.