Insurance and reinsurance regulation in the European Union has moved from the solvency issue-based initial phase, dubbed “Solvency I,” to a broader phase, known as “Solvency II.” Solvency II focuses on concepts of capital requirements, risk management practices, supervisory activities, reporting, and disclosures. The Solvency II initiative recently passed a notable milestone with approval by the European Parliament in April 2009, and by the European Union’s Economic and Financial Affairs Council in May 2009. It appears to remain on track for implementation in 2012.

Whether Solvency II will affect the volume of reinsurance writing remains to be seen. The new regulation of capital requirements may mean that small and mid-size insurers may need to look more to reinsurance. On the other hand, the new regulations will require new, more precise, risk management models for larger insurers, but at the same time may allow them to fulfill the new capital solvency requirements without reinsurance. Consequently, the net effect on reinsurance business may not change dramatically.

The Solvency II framework will now enter a so-called “Quantitative Impact Studies” phase. This phase is essentially a data collection undertaking by the various government and industry participants to fine tune the program. Expect Focus and Jorden Burt’s reinsurance blog (www.reinsurancefocus.com) will track and report on developments as they occur.