An Overview of Solvency II

By: Michael Loo and Justin Meagher

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Solvency II is a Directive in European Law whose aim is to establish a revised set of EU-wide capital requirements and risk management standards for the insurance industry. The main goals are to improve consumer protection, modernize supervision, and deepen EU market integration. This is done by ensuring a uniform and consistent protection for policyholders across the entire EU and by supervisors evaluating an insurer’s risk profile, quality of risk management, and governance.

The Pillars of Solvency II

Solvency II is based on three guiding principles or pillars:

  • Pillar 1 – Financial Requirements – ensures firms are capitalized with risk-based capital. Firms can either follow a standard formula or use an internal model in order to calculate their solvency capital requirements.
  • Pillar 2 – Governance and Supervision – ensures firms have the proper risk management and governance in place. Firms must complete their Own Risk and Solvency Assessment (ORSA) plan, which contains qualitative details about their risk profile.
  • Pillar 3 – Report and Disclosure – requires firms to provide transparency to stakeholders as well as regulators by disclosing financial information that is relevant and reliable. This is done on both a quarterly and an annual basis.

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