Solvency II
Solvency II: company-wide risk management and adequate funding
As European insurers and reinsurers respond to renewed opportunities, they face the complex challenge to implement the Solvency II directive. This regulation must be implemented and operational before 2014. Solvency II includes a new set of regulatory requirements for insurers that operate in the European Union. The directive requires that company-wide risk management is embedded throughout the entire organization to manage all material risks.
The directive has two main goals:
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Transparent, standardized external reporting and accountability, and by doing so creating level insurance environment
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Demonstrate that insurers can meet their financial obligations with sufficient funding, given all their material risks
Based on standardized principles, material risks must be identified and quantified. A standard capital requirement model (SCR) or the organization’s own developed and approved internal model must be used to quantify the capitalized risks to allocate sufficient funding to be solvent. The biggest impact on organizations is caused by Pillar 2 of Solvency II (called the ORSA). Insurers must demonstrate to regulators how they embed risk management to identify, assess, monitor and manage their company-wide material risks. Pillar 2 requires risk management be embedded and used on a daily basis, a six step regular ORSA and non-regular ORSA process be enacted in which the board, besides the financial QRT reporting, be hold accountable by the regulator.
Required: Quantitative and Qualitative Risk Management
The best practice for insurers, as they strive for Solvency II compliance, is to embed qualitative and quantitative risk management throughout their organization. A process-based risk approach is the best foundation for risk management of market, credit, liquidity, insurance and all operational risks. Developing such a program is a complex project, due to the involvement of the entire business, and results in an overall risk-control framework. To be prepared it is imperative that insurance companies begin developing qualitative and quantitative process-based risk management approaches and integrate this with their quantitative systems.
Best practice: to Solvency II compliance
Trusted by hundreds of customers worldwide, BWise delivers Governance, Risk and Compliance (GRC) and Enterprise Risk Management (ERM) solutions to insurance firms. Based on the developed Solvency II methodology, BWise has successfully partnered with insurance and reinsurance firms to implement risk-based solutions for Solvency II. Based on the requirements of Solvency II, BWise has developed templates, a risk framework and workflows that can serve as a starting point to complete and embed company-wide risk management of Pillar 2, as well as supporting the regular and non-regular ORSA process.
