On 17 January 2015, the European Commission’s Solvency II Delegated Regulation (2015/35) was published in the Official Journal of the European Union. The Regulation came into force on 18 January 2015, and it is now “directly applicable” to (a) the “competent authorities” of the Member States of the European Economic Area; and (b) all relevant EEA (re)insurers.
The Regulation has:
- Three titles:
- I) Valuation and Risk-Based Capital Requirements (Pillar I), Enhanced Governance (Pillar II), and Increased Transparency (Pillar III);
- II) Insurance Groups; and
- III) Third Country Equivalence and Final Provisions;
- 151 recitals;
- 381 articles;
- 26 Annexes; and
- Too many pages of correlation tables to count.
The Regulation will form the core of the single prudential rulebook for (re)insurers in the EEA. In particular, it includes rules:
on the market consistent valuation of assets and liabilities, including technical provisions;
on the eligibility of own fund items;
for calculating and calibrating the Minimum Capital Requirement (MCR);
for calculating the standard formula Solvency Capital Requirement (SCR);
for (re)insurers applying to use an internal model to calculate their SCR;
on the systems of governance – for example, the role of the key functions (actuarial, risk management, internal control / compliance and internal audit);
on some aspects of the supervisory review process;
on reporting and disclosure requirements, both to supervisors and to the public;
about groups, such as the methods for calculating the group SCR, and the operation of branches; and
for assessing third country equivalence.
The Regulation takes a more aggressive approach than the Directive to the proportions of the MCR and SCR that must be covered by own funds in tiers 1, 2 and 3. An insurer must now have at least 50% of its SCR, and at least 80% of its MCR, covered by tier 1 capital. According to the Commission’s press release and FAQ’s, “The intention of the stricter limits is to improve the risk-sensitivity of the Solvency II framework by allowing supervisors to intervene if the capital held by insurers is not of a sufficient quality. The limits are not however so restrictive as to make it impossible for mutual insurers, who cannot raise ordinary equity (tier 1), to recapitalise.”