Solvency II: Restructuring the Insurance Sector (Part 3)
In part 3 of our series on Solvency II, we will try to understand Title I of the Solvency Act in some depth.
Title I: General Rules On The Taking-Up And Pursuit Of Direct Insurance And Reinsurance Activities
The key objectives of this title are:
- The taking-up and pursuit, within the community, of the self-employed activities of direct insurance and reinsurance
- The supervision of insurance and reinsurance groups
- The reorganisation and winding-up of direct insurance undertakings
This title covers the Calculation of Solvency Capital Requirements.
The Solvency Capital Requirement will be calculated on the presumption that the undertaking will pursue its business as a going concern. The Solvency Capital Requirement will be calibrated so as to ensure that all quantifiable risks to which an insurance or reinsurance undertaking is exposed are taken into account. It will cover existing business, as well as the new business expected to be written over the following 12 months. With respect to existing business, it shall cover only unexpected losses.
It will correspond to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 99.5 % over a one-year period.
The Solvency Capital Requirement shall cover at least the following risks:
- Non-life underwriting risk
- Life underwriting risk
- Health underwriting risk
- Market risk
- Credit risk
- Operational risk
Operational risk includes legal risks, and exclude risks arising from strategic decisions, as well as reputation risks. When calculating the Solvency Capital Requirement, insurance and reinsurance undertakings shall take account of the effect of risk-mitigation techniques, provided that credit risk and other risks arising from the use of such techniques are properly reflected in the Solvency Capital Requirement. Insurance and reinsurance undertakings shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the supervisory authorities.
The calculation of the Minimum Capital Requirement shall be calculated in accordance with the following principles:
- To be calculated in a clear and simple manner, and in such a way as to ensure that the calculation can be audited;
- To correspond to an amount of eligible basic own funds below which policy holders and beneficiaries are exposed to an unacceptable level of risk were insurance and reinsurance undertakings allowed to continue their operations;