Solvency Issues : Solvency II

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Solvency II is to be implemented on the 1st January 2016. It is a three pillar based system (based on Basel II) that follows on to try and fill the gaps from Solvency I. Solvency II is a far more risk based approach than its predecessor and is the greatest regulatory change that insurance firms in the EU have faced. Inevitably, Solvency II brings its own challenges and difficulties. Whether Solvency II will lead to positive or negative changes remains a point of contention between stakeholders, but what is clear is that it will be a much more significant transformation than Solvency I. Since the 1970s the EU has had solvency requirements in place which require a regulatory capital to protect against any unforeseen circumstances. EU states agreed in the 1990s that a review should be put in place to reform and improve standards. Solvency I was the result of this review (Lloyd’s, (no date)). Following Solvency I’s implementation, it became increasingly obvious that it didn’t have all of the significant changes needed. From this Solvency II was crafted, looking to improve from Solvency I. “It is unacceptable that the common regulatory framework for insurance in Europe in the 21st century is not risk based and only takes account, very crudely, of one side of the balance sheet.” (Matthew Elderfield, 2013) Solvency II looks to introduce a new set of aims including risk-sensitive capital requirements, more sufficient and consistent standards across the EU to further single
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