EU informally agrees on Solvency II framework for insurance firms
An informal agreement was reached on 26 March 2009 on the broad framework principles of the Solvency II Directive, that should enable European Union (EU) Parliament members and the EU Council to formally approve it next month.
Solvency II will introduce a risk-based capital regulatory regime for insurers, reinsurers and captive companies with more than e5 million ($6.8 million) in gross premium volume that operate in the European Union. The directive is slated for implementation in 2012.
Often called "Basel for insurers," Solvency II is somewhat similar to the banking regulations of Basel II. For example, the proposed EU Solvency II framework has three main areas (pillars):
Pillar 1 consists of the quantitative requirements (for example, the amount of capital an insurer should hold).
Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers.
Pillar 3 focuses on disclosure and transparency requirements.
The project also tackles the issue of asset and liability valuation, and will be aligned with the accounting treatment of insurance contracts under the forthcoming International Financial Reporting Standards (IFRS Phase II). As a risk-based solvency regime, Solvency II encourages the use of internal models.
Some countries such as the UK and Switzerland have anticipated this development and already started to implement risk-based regulatory requirements similar to Solvency II.
Solvency II is being seen as the appropriate answer to the financial crisis, because it provides incentives for sound risk and capital management and provides policyholders with better protection.
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