The concept of risk-based capital is not new to the IoM’s insurance sector, and is already contained within the provisions of the authority’s Corporate Governance Code of Practice for Regulated Entities.
However, the new framework is expected to update and expand significantly using more detailed implementation measures, which will require insurers to calculate regulatory capital using a new risk-reflective solvency and capital model.
All insurers will be required to comply with two levels of solvency: a Minimum Capital Requirement, below which no insurer will be regarded as viable to operate effectively and a Solvency Capital Requirement, above which, supervisory intervention, for solvency purposes, will not be expected; with a sliding scale of supervisory intervention between these points.
Concentrating initially on life insurers, the authority is developing a Standard Capital and Solvency model to address the main risks to which life assurers may be exposed.
The new risk-based capital requirement will rely on insurers having an Enterprise Risk Management framework that can adequately identify, assess, measure and monitor risks.
The authority will require insurers to provide evidence they have such systems in place; that they understand their risks; and that both economic and regulatory capital reflect the risks to which they are exposed.”*
This chimes clearly with the purpose and practice of Solvency II and the IoM will not be alone in seeing the advantages of this.
Like others, the IoM’s timing should also benefit from the existing experience of Solvency II, both from the development phase of Solvency II and post-introduction.
This is explained further in the IoM authority in its annual report: “The EU’s Solvency II project is a fundamental reform of the prudential regulatory framework for the European insurance industry.
“It establishes a revised set of EU-wide solvency and capital requirements, governance and risk management standards, supervisory oversight process and disclosure requirements and comes into effect for all EU insurers on 1 January 2016.
“Under the provisions of the Solvency II Directive a third country, such as the Isle of Man, may be assessed by the European Commission as being ‘equivalent’ where it is able to demonstrate that its legislative framework and supervisory regime in respect of insurance business provides similar levels of policyholder and beneficiary protection to that provided under Solvency II.
“Accordingly, in undertaking its work in the development of a risk-based capital and solvency assessment framework consistent with the revised ICPs (Insurance Core Principles), the authority will seek to ensure the revised framework, insofar as it applies to the life sector, will also be capable of a positive equivalence assessment under the Solvency II framework.”*
Implications for the market
For advisers who have important relationships with international life insurance companies, the most important question to address is awareness.
Solvency II and the wider adoption of risk-based capital-oriented regulation or equivalence, should not be a source of worry, but its significance for those insurer partners with whom business might be done must be understood.
The fundamental financial strength of insurers is not changed by Solvency II, but some of their composition and communication, for example in changed capital surplus and solvency coverage ratios in the new regimes, may be.
And while it comes at a cost, ultimately this development improves the identification of risk and capital requirements within insurer businesses for their benefit, assists their regulators around the world and works to the advantage of advisers’ clients, wherever they may be.
*Source: 2015 Annual Report of the Isle of Man Insurance and Pensions Authority
