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04

Solvency II: IFoA explains legal requirements of directive

Open-access content 7th April 2015

The IFoA has published a policy paper to explain the new legal demands on insurers under Solvency II.

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The document was published on 1 April to coincide with the date from which insurance companies can submit applications for approval of internal models, matching adjustments and volatility adjustments by the Prudential Regulation Authority (PRA).

The PRA aims to make a decision to approve or reject any application within six months of receiving it. For standalone applications to use volatility adjustments (applications that are not dependent on other approval decisions), the regulator aims to decide within six weeks.

Solvency II, which will take effect on 1 January 2016, is an EU directive designed to harmonise insurance regulation across members states. It will also impose a range of obligations on insurers such as capital requirements to reduce the risk of insolvency and to protect policyholders that providers are able to pay claims.

The IFoA paper describes the key features of the "three pillars" that form the structure of Solvency II requirements: pillar one, which consists of quantitative requirements such as the amount of capital a firm should hold; pillar two, which consists of qualitative requirements such as risk management systems and supervisory review processes; and pillar three, which focuses on disclosure and reporting to the regulator.

Regulatory responsibility for the implementation of Solvency II in the UK lies with the PRA and the Financial Conduct Authority. 

The paper also outlined the IFoA's contributions to consultations by the regulators and UK government on subjects including: gold-plating, matching adjustment, volatility adjustment, regulation of actuaries, national specific templates for reporting and early warning indicators. The PRA has proposed early warning indicators to assess whether UK insurers using internal models, following approval, would continue to meet Solvency II standards.

"The IFoA has been and continues to be an active participant in discussions on the development of Solvency II, whether these are led by European or UK regulators and whether they are formal or informal consultations," the paper said.

Last month the PRA published its final rules on Solvency II and Paul Fisher, its executive director, explained how reporting templates were made simpler for firms.

This article appeared in our April 2015 issue of The Actuary.
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