Solvency II is gear upwardly of rules gear upwardly past times regulatory torso that tells insurance companionship regarding how much uppercase should they hold.
Let’s empathise amongst the assistance of an example…
Suppose at that topographic point are 2 insurance companies i.e. Company X as well as Company Y
On the solid soil of alone this information, what produce you lot think, which companionship is financially potent ? which companionship is performing ameliorate ?
Your respond would live that both these companies get got same flat of security.
Now permit us hand you lot farther information i.e. breakdown of property classes
Company X – Assets
Company Y – Assets
Corporate Bonds-AAA credit rating
Now tell us, which companionship is less risky ? which companionship has to a greater extent than likelihood of non making default on at that topographic point obligation i.e. payment to policyholders….
Obviously companionship X is to a greater extent than risky than companionship Y. That’s why the concept of Risk Based Capital government comes into existence which states that
The to a greater extent than risky the companionship is, the to a greater extent than volition live the uppercase requirement.
Now enquiry is what is uppercase requirement ?
Capital requirement is the amount of uppercase that a companionship has to concur to ensure that they get got sufficient assets available to pay off their liabilities whenever they due inside a given fourth dimension frame amongst a given flat of confidence.
Definition of Solvency II
· It is the rules governing how insurers are funded as well as governed. Here, insurers volition postulate plenty uppercase to get got 99.5 portion confidence they could create produce amongst the worst expected losses over a year. The rules accept a risk-based approach to regulation: the riskier an insurer’s business, the to a greater extent than precautions it is required to accept (i.e. to a greater extent than volition live the uppercase requirement)
· It applied to insurers based inwards European Union as well as Britain every bit well
· All European Union insurance as well as reinsurance companies amongst gross premium income exceeding €5 i 1000 1000 or gross technical provisions inwards excess of €25 i 1000 1000 (Now enquiry is what is Technical provisions ?? nosotros volition speak over it inwards the end)
· Regulator is PRA i.e. Prudential Regulatory authorization precisely supervision is beingness done past times EIOPA i.e. The European as well as Occupational Pensions Authority, which is the EU’s insurance regulator.
Three Pillars of Solvency II
Solvency II is based on iii pillars i.e.
Pillar 1: Quantitative requirements
· It covers the concept that how tin nosotros quantify the opportunity into the uppercase requirement that companionship should hold.
· It sets the 2 distinct uppercase requirements i.e. SCR as well as MCR
o SCR: Solvency Capital requirement is the amount of uppercase that companionship should concur every bit prescribed past times regulatory solid soil (i.e. methods as well as assumptions). If companionship does non concur SCR as well as hence regulator volition intervene inwards insurance companionship job organization as well as endeavour to cut the opportunity inside the job organization such as:
§ Asset liability matching
§ Investment inwards less risky assets
§ No bonus distribution
§ Increase inwards reinsurance
o MCR: Minimum uppercase requirement. If companionship does non concur fifty-fifty MCR flat of capital, as well as hence insurance companionship license may teach cancel to sold novel business
Pillar 2: Qualitative requirements
· It focuses on
o Risk management
· Insurers are required to acquit out an Own Risk as well as Solvency Assessment (ORSA)- The Economic uppercase model is a telephone substitution chemical element of the ORSA process, as well as this is required to live reviewed past times the supervisor.
Pillar 3: Reporting as well as Public disclosures
· It comprises of disclosures as well as reporting regime. Reports to world as well as regulators are required to live made.
In our adjacent article nosotros volition speak over each as well as every element of this residue canvas inwards special as well as inwards a uncomplicated as well as layman language.
But let’s run across i skilful instance based on this residue sheet.
Suppose Assets = 100, Liabilities i.e. Technical provisions = 60
Then Own Funds or NAV i.e. Net Assets Value = 100 – lx = xl million
Now Let’s say SCR = xv as well as MCR is v million
Then Surplus or Excess Assets = Own Funds – SCR = xl -15 = 25 million
So that is what nosotros are trying to say if my NAV (or OF i.e. Own funds) is less than xv i 1000 1000 (i.e. SCR) as well as hence regulator volition intervene as well as if my NAV is less than v i 1000 1000 (i.e. MCR) as well as hence insurance companionship volition non live allowed to sell novel business!!!!
We promise that you lot enjoyed this article, nosotros are creating a serial of articles on Solvency II. Stay Tuned