April 24th, 2009

Solvency II Passes European Parliament

Posted at 1:00 AM ET

The European Parliament approved the proposed Solvency II directive on Wednesday. The EU’s Economic and Financial Affairs Council is expected to adopt the framework by May 5, 2009, with the measure likely taking effect in 2012.

The version for which the European Parliament voted did not include the “group support” provision, which would have entailed the determination of capital adequacy requirements by taking into account the full geographical diversification benefit on an entire-group basis. This issue may be revisited in 2015.

Solvency II is intended to create a risk-based capital (RBC) framework for insurers and reinsurers in Europe. Under the directive, carriers would have to demonstrate that they have sufficient capital to maintain a 99.5 percent likelihood of solvency for the coming 12 months given the risks in their portfolios.

The solvency capital requirement (SCR) is at the heart of Solvency II. Carriers are offered two methods for calculating the SCR. The first is based on a standard, portfolio-agnostic formula. The second involves the full or partial implementation of approved internal models. Specifically for the catastrophe component of the SCR, there are three options — the formula-based approach, regional scenarios provided by the regulator for natural and man-made catastrophes geographically, and internal models.

Using an internal model, insurers and reinsurers can tailor the SCR to the specific risks they cover. If this leads to an SCR that is lower than that calculated with the standard formula, carriers can use the difference to invest in growth opportunities. The internal model option thus enables “competitive compliance” — risk-bearers can use the targeted calculation of the SCR to secure a competitive advantage.

While it is too early for an internal model to be approved for Solvency II compliance, Guy Carpenter’s MetaRisk® platform offers the capabilities that will likely be necessary for calculating the SCR and fulfilling the internal model requirements defined under Solvency II.

Contact Guy Carpenter for more information about MetaRisk >>

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Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

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