The introduction of Solvency II will make effective risk management more important than ever for the insurance industry, according to the chair of the European Insurance and Occupational Pensions Authority.
Gabriel Bernardino said the scheduled implementation of the new regulatory regime at the start of 2014 would involve a 'heavy reliance' on robust risk management practices.
Speaking at a European Federation of Loss Adjusting Experts event in Portugal on Friday, he said: 'The Solvency II regime is increasingly being perceived as more than a "check the box" regulatory exercise that determines capital requirements.
'It requires the European insurance industry to critically analyse its risks, and in the process, assess the true costs attached to them.'
Mr Bernardino said insurers were already 'at the forefront' of applying strong risk management, in particular to address the challenges posed by the economic slowdown, market volatility and changes in demographics and catastrophe patterns.
Despite this, risk management has not historically been seen as a key element of the insurance regulatory regime, he explained.
'This has changed with Solvency II,' Mr Bernardino said. 'I believe that appropriate risk management is a cornerstone of any modern risk-based regulatory regime and consequently has its own role in the supervisory process.'
Under Solvency II, insurance and reinsurance companies would be expected to have a risk management system which includes the strategies, processes and reporting procedures needed to continuously identify, measure, monitor, manage and report potential risks.
'Importantly, risk management cannot be seen as a point in time procedure,' Mr Bernardino explained. 'It is a continuous process that should be used in the implementation of the undertaking's overall strategy and should allow an appropriate understanding of the nature and significance of the risks to which it is exposed, including its sensitivity to those risks and its ability to mitigate them.'
In particular, he said it was 'paramount' that companies recognise the ultimate responsibility of their management for ensuring the risk management system used is 'suitable, effective and proportionate' to the risks the business faces.
The system must also be documented and communicated to relevant staff and management, to ensure it is embedded in how the company does business.
Mr Bernardino said an effective risk management system should cover all material risks a business undertaking might be exposed to, as well as being integrated into the structure and decision-making process of that undertaking.