Outline of Solvency II
Supervision of the insurance market
For insurance companies there are many requirements imposed to ensure the safety of insurance.
Insurance business because of its social and economic importance has been a subject of supervision of a specialized organ of state administration.
Solvency requirements
Solvency is the company's ability to repay obligations on time.
It is the primary criterion for assessing the financial condition of an insurance company.
One of the basic requirements for conducting insurance business relates to the solvency margin.
The solvency margin is the size of the insurer's own resources fixed by law, which aims to ensure the solvency and can not be less than the minimum amount of the guarantee fund.
Requirements for the solvency margin for insurers were introduced in 1973.
With the development of the insurance market and the emergence of new products and risks, the existing requirements no longer fully reflected all risks that insurance companies were exposed to. This was related mainly to financial risks - risks such as changes in interest rates.
Despite meeting the existing solvency requirements, the financial condition of insurance companies was getting worse. The solvency requirements failed to meet expectations of security for insurance business. Not without importance was the fact of the growing focus of international insurance business around the capital groups.
The first step in improving the solvency system was the introduction of Solvency I.
In Polish law the Solvency I increased the amount of a minimum guarantee capital for limited companies in Group I (life insurance) from 800 thousand EUR to 3 million EUR, for Division II (life insurance) groups of 1-9 and 16-18 from 300 thousand EUR and 200 thousand EUR to 2 million EUR. It also introduced an annual indexation of the minimum guarantee capital.
Changing financial and economic reality forced the debate on changes in the new solvency system of insurance companies. Number of studies of the risks of insurance business, bankrupcies analysis, analysis of existing solvency models implemented in other countries were done. The result of these actions was to create a new test system for Solvency II. The European Commission within the European Committee framework launched it in 2001.
The need to introduce Solvency II arose mainly from manifold imperfections in existing regulations concerning solvency, among them being premium-based methods, which do not take significant risks into account, no complete account of forms of risk transfer, no account of the relationship between assets and liabilities and the scope of their operations.
Newly established Solvency II system has to be universal and it has to extend to all insurance companies operating in the EU.
It is based on the Basel II, which sets out rules for the solvency of banks.
Risk
The new assessment system on solvency consistent with the Solvency II is to be matched to the actual risks faced by insurance companies. In case of insurance institutions potential risks are specific to the types of insurance contracts concluded in the field of life insurance or property insurance.
Ability to effectively identify, assess and monitor the risks can prevent form significant losses.
Accepted methodologies of risk management in order to eliminate their negative impact on financial results play here the key role.
Risks which the insurer is exposed to, can be divided into:
1. Actuarial Risks - related to future technical results, dependent on random factors: the frequency, intensity of damage, operating costs, changes in the composition of the portfolio, withdrawal or conversion of insurance contracts.
2. Financial Risks - risks faced by each financial institution, such as a bank. This group includes risks such as: changes in interest rate, credit risk, market risk, and currency risk.
The developed system is intended to harmonize the accounting assumptions concerning insurers accountancy, calculation of technical provisions and principles of investment.
What is the additional value of Solvency II?
Supervision of insurance has to focus on ways to control risk management by insurance companies, as well as on the accuracy of assumptions.
The idea of Solvency II relies on closer dependence between the amount of the capital and risk taken against insurance companies.
Ways of reporting of insurance companies in different countries are to be standardized.
Solvency II will have much greater scope than the Solvency I, it has to take into account the impact of new trends in the field of risk management methodology in the insurance, the broader financial engineering and accounting standards consistet with the requirements of the IASB (International Accounting Standard Board).
The main intention of the project is to find the solvency margin requirement and to achieve greater synchronization in determining the level of technical reserves.