By now, you’ve definitely heard the words “Solvency II”. You’ve seen the phrase all over business news websites and your social media feeds – you know it’s a very big deal. You’ve been told it’s arguably the biggest change to insurance regulations in 30+ years. But do you know what it actually is?
Solvency II is a legislative programme being implemented across the EU, set to come in to effect in the UK on January 1st 2016. The directive reflects the more advanced and elaborate risk management systems that have been developed since Solvency I was introduced in 1973. The primary concern of Solvency II is ensuring that companies hold an appropriate amount of capital to reduce the risk of insolvency, with the end goal of protecting customers. But it’s not just about capital – the regime consists of three “pillars”, which should together make insurance businesses run in a risk-based manner.
Pillar 1 contains the quantitative requirements, such as the aforementioned rules regarding how much capital insurers must hold. Pillar 2 lays out regulations for Governance and Risk, including rules about effectively supervising insurers, and Pillar 3 concerns transparency and disclosure requirements.
The biggest change in Pillar 2 is the newly made need for designated key function holders – members of staff dedicated individually to risk management, compliance and actuarial. For smaller organisations this could require a huge expansion to what was previously a one-man team, and risk and compliance can no longer be handled part time by, for example, a Finance Officer. Sam Woods of the PRA has defined these as ” functions whose operation, if not properly managed and overseen, could potentially lead to significant losses being incurred or to a failure in the ongoing ability of the firm to meet its obligations to policyholders”.
With the remaining days of 2015 rapidly running out, what do affected firms need to consider and get ready for? Any company covered by Solvency II needs to know what Capital Model they’re using, how their model operates, for what reasons they’re using their specific model and how their model is going to be independently valid. The regulators have made it very clear that in terms of the risk aspect of Solvency II, a “tick box” approach will not be enough and they’re looking to see organisations create and encourage a genuinely risk aware culture.
If you have any concerns about what this means for you then please get in touch and we can assist with interpreting what Solvency II means to your business. Please contact me on 01216432100.