Solvency II is a EU Directive (2009/138/EC) codifying the EU insurance regulation that has been almost 15 years in the making. The Solvency II regime will be applied from 1 January 2016 in the EU member states.
The key objectives of the Solvency II Directive are:
- Improved consumer protection
- Modernised supervision
- Deepened EU market integration
- Increased international competitiveness of EU insurers
The Directive has been developed according to the so called Lamfalussy architecture which basically means there are four levels of regulatory texts:
- Level 1 - The Directive itself
- Level 2 - Implementing measures which are more detailed rules supplementing the Directive
- Level 3 - Non-binding standards and guidance
- Level 4 - Post-implementation enforcement by the EU Commission after review of the member state transposition of the rules
Solvency II can be described in terms of its three pillars:
- Pillar 1 - Financial requirements, e.g. the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR)
- Pillar 2 - Governance and supervision, e.g. ensuring effective risk management systems
- Pillar 3 - Reporting and disclosure, containing rules regarding regulatory and public reporting
The main purpose of the Solvency II Directive is to enforce a more prudential level of capital requirements in the insurance industry than the previous regulation called Solvency I.
The Lloyd's insurance market has an excelent site dedicated to the Solvency II Directive.