On 1 January 2016, Solvency II finally landed and became the key regulatory framework for EU-based insurers and their subsidiaries. This article considers how international or ‘offshore’ life insurance companies are affected by Solvency II, now and in the future.
Its importance should not be underestimated. It is the most significant development of the regulatory framework for EU insurers in decades.
As a result, there should be no doubting its implications for advisers’ broader understanding of the life insurance companies they do business with or might consider dealing with in the future.
Before looking at the composition of the international life insurer community and which companies have already been touched by Solvency II, it is worth recapping on what it is and what its core attributes are.
Working with risk
The Solvency II directive (Directive 2009/138/EC) is a consolidation of 13 separate directives for insurers covering their capital requirements and related supervision.
It introduces a more risk-based approach using market-consistent methods for valuing the assets and liabilities of insurance companies. It utilises, where possible, actual market prices or market value techniques to establish what a fair market value would be.
Solvency II reinforces the principles of risk management and its role in ensuring capital adequacy for insurers.
According to the European Commission, the objectives of Solvency II are:
- To eliminate the differences between the national rules that member states apply to (re)insurance companies.
- To improve the operation of the single market by establishing co-ordinated rules for all insurance groups.
- Protect creditors by establishing procedures for the reorganisation and winding up of insurance undertakings
Like Basel II for the banking sector, it is founded on three pillars:
- Pillar 1 contains the quantitative requirements for ensuring financial strength.
- Pillar 2 establishes the requirements for governance, risk management and effective.
- Pillar 3 relates to disclosure and transparency.
Watch this space
A number of international life insurance companies rated by AKG may have already been swept into the mechanism of Solvency II by dint of their position within wider insurance company groups. Through their UK and other onshore EU domiciles or activity, these are firmly within the scope of Solvency II.
These international companies might therefore be deemed as already touched by the hand of Solvency II.
They will have been exposed to and contributed to the genesis of Solvency II (a long, painful and resource consumptive process) through interaction and data delivery for group submissions, model development and process building. They will also, in many cases, have had group specialist resources interacting with them and experienced the language and culture of the move to the Solvency II world.