Solvency II is the new regulation governing the insurance and reinsurance sectors. It was established to overcome the weaknesses of the Solvency I directive. The main objectives of this new regulation entering into force in 1st January 2016 are:
- Strengthen the policyholder protection;
- Improve the prudential regulation;
- Improve the competitiveness of EU insurance companies;
- Deepen the single market.
Solvency II is based on three pillars:
- Pillar 1 : Quantitative requirements
- Pillar 2 : Qualitative requirements and supervision
- Pillar 3 : Prudential reporting and public disclosure
The quantitative requirements require from insurance and reinsurance companies to adopt a new calculation method of technical provisions and capital requirements in order to take into account all the risks to which theses undertakings are confronted.
Via the second Pillar of Solvency II, the insurance and reinsurance undertaking must set up a governance structure which includes four key functions:
- Risk management function;
- Actuarial function
- Internal audit function;
- Compliance function.
Finally under the last Pillar, Solvency II establishes standards of publication to improve the transparency towards the public, the shareholders and the supervisory authorities.