History and assumptions
The European Commission began work on establishing a new solvency system for insurance activity (Solvency II) in 2001. It was part of the “Financial Services Action Plan”. It basis was set out in European Commission document No. MARKT/2509/03 of March 2003, which was the result of almost two years of analytical and conceptual work.
Considerations on the design of a future prudential supervisory system
Design of a future prudential supervisory system in the EU - Recommendations by the Commission Services
Study into the methodologies to assess the overall financial position of an insurance undertaking from the perspective of prudential supervision (KPMG report)
Solvency of insurance undertakings (Müller report)
Prudential supervision of insurance undertakings (Sharma report)
Report of the working groups on life assurance to the IC Solvency Subcommittee
Reports of the working groups on non-life technical provisions to the IC Solvency Subcommittee
Technical Provisions in Non-Life Insurance (Manghetti report)
The assumptions of the Solvency II specify that:
1. Supervision authorities should possess appropriate tools for carrying out comprehensive evaluations of the situation in insurance companies in terms of their overall solvency, which means that the new system, apart from quantitative factors, should also take account of qualitative aspects of the activities of those companies, such as management and internal control.
2. The system should encourage and motivate insurance companies to appropriate manage the risks to which they are exposed.
3. Quantitative capital requirements should be structured on two levels: target capital and minimal capital. Such a structure is essential for supervision authorities to take appropriate remedial action in a company.
4. In order to ensure consistency among solutions employed throughout the financial sector, the Solvency II system should be, wherever possible, compatible with the approach and regulations accepted in the banking sector.
5. The system should be directed towards the most effective supervision over insurance capital groups and financial conglomerates.
6. It is necessary to harmonise European supervisory, accounting and reporting standards.
7. The Solvency II is introduced in accordance with the Lamfalussy Process.
The construction of the system Solvency II is based on a structure involving three mutually connected pillars to which the individual risk categories connected with an insurance company’s activities are subordinated.
1. Pillar I covers quantifiable types of risk entailed by the activities of an insurance company. The goal of the work conducted under Pillar I is to determine capital requirements which take account of all measurable types of risk stemming from the activities of an insurance company, as well as to determine the rules and scope of application of what are known as internal models for evaluating insurance company risk.
2. Pillar II covers those types of insurance company risk which are not covered by Pillar I, as well as standard supervision procedures. The work conducted under Pillar II is aimed at developing effective tools for monitoring and controlling the risks to which an insurance company is exposed, both internal tools within a company and supervision tools. Pillar II assumes that, in evaluating solvency, individual characteristics should be taken into account, including as well those characteristics of a specific company which are of a qualitative nature. Pillar II is also concerned with such issues as the quality of the management of the business, and of its internal control and auditing. Moreover, Pillar II contains rules for exercising and harmonising supervision standards and rules of cooperation among supervision authorities.
3. Pillar III covers self-regulation and market tools through the creation of conditions for market transparency, and sets out information duties and appropriate solutions (standards) pertaining to accountancy.