On the 22nd December, 2014, the MFSA commenced a consultation process on proposed amendments to the Insurance Business Act and the Insurance Intermediaries Act.
The proposed amendments include the Solvency II Directive which will mark a radical overhaul to the regulatory landscape for the insurance and reinsurance industry. This directive has deviated from the one-approach-fits-all picture under Solvency I to an approach that is tailored to the risks which insurance companies are exposed to since it encourages such companies to measure and manage risk.
One of its main aims is that of providing for adequate protection of policy holders and beneficiaries. The other aim of such directive is to increase competition in the EU insurance market by updating the approach taken to determine the capital an insurance undertaking should hold against unforeseen events, thereby improving insurer creditworthiness and the risk-management standards required by insurance companies to achieve this.
The Solvency II Directive is targeted towards all insurance companies, both of the captive and non-captive type within the European Union. It will bring a harmonised, risk-based solvency regime across Europe. Consequently, insurance companies will be required to inspect their own risk and solvency assessment, and understand their risk profile and associated capital requirements. In fact, in order to provide assurance that they meet the capital requirements under Solvency II, these companies will be encouraged to establish a clearly defined risk and capital strategy in their organisation. This means that companies will need to develop more risk management controls and risk reporting.
It is based on the Basel II three pillar structures, which has been modified for the insurance sector and provides for both the quantitative and qualitative aspects of risk:
- Pillar I is concerned with the calculation of capital requirements.
- Pillar II provides for the review of risk management and governance processes.
- Pillar III focuses on disclosure and transparency requirements.
This Directive includes rules relating to the valuation of assets and liabilities, technical provisions; own funds, the Solvency Capital Requirement, the Minimum Capital Requirement and investment rules. It also provides rules for an effective system of governance to ensure adequate management of insurance or reinsurance undertakings. Moreover, the Solvency II Directive includes a new Chapter on the supervision of insurance and reinsurance undertakings in a group, which enables supervisory authorities to form a more soundly based judgment on their financial situation.
Due to the distinct characteristics borne by different companies, firms can build a more efficient business operation that serves their long-term strategy by considering not only the requirement to quantify risks and calculate the capital requirements but also the general model of risk governance and the whole approach to management information and reporting. The Solvency II Directive will come into force on January 1, 2016, aimed at achieving a level playing field across the EU for insurance players in the market.