Solvency II

Only 18 months are left for the European insurance industry and its service providers to fully prepare for the requirements set forth in the Solvency II Directive.

This Directive, introduced more than 10 years ago, represents a European regulatory initiative intended to further solidify the entire insurance sector. The impetus behind Solvency II, in simple terms, lies in matching insurers' equity capital with the risks they incur, in order to ensure an efficient allocation. Insurers obviously have not waited for Solvency II to analyse either their markets or the financial products that make up their portfolios.

The real challenge nonetheless will be to provide the financial information required by this impending Directive:

• Calculation of the SCR(1) and the MCR(2);

• Valuation of the prudential balance sheet;

• Own Risk and Solvency Assessment (ORSA)(3);

• 1-year VaR at 99.5%;

With so many financial criteria to be taken into account, a new organisational structure and reporting procedures will need to be created to face these challenges.

This reform is critical for all financial institutions and not just insurers, since it issues conduct and investment rules for financial players in the economy. In addition, 2011 is especially important in the overall preparation for Solvency II given that the year's calendar is loaded with key milestones. All stakeholders will need to be operational on 1 January 2013, even if the definitive regulatory texts have still not been published.

The results of the Quantitative Impact Study 5 (QIS5) and the consultation on 2nd-level measures (detailed applications) have been very helpful in highlighting issues that still need to be addressed. On 24 March of this year, the European Insurance and Occupational Pensions Authority (EIOPA)(4) was pleased to observe the participation rate among insurance industry stakeholders at the QIS5 release. The EIOPA did nonetheless underscore "the inconsistency in valuations presented" due in particular to the application of IFRS standards as well as the difficulty involved in calculating mark-to-market portfolio valuations. The European Commission is responsible for publishing the set of 2nd-level measures. For its part, they indicated on 5 May the following topics for strategic reflection subsequent to the consultation initiated at the beginning of the year:

• Consequences of holding long-term assets;

• Volatility induced by financial-market cycles and insurance-related activities;

• Limitation of the number of reports to be submitted;

• Definition of the transition period.

SGSS is prepared to meet the Solvency II challenges alongside its clients and to provide them with added-value services, notably by means of fair-value portfolio valuations, independent asset pricing, stress tests, calculation of market returns and risks, calculation of the counterparty risk, and raising the level of transparency in mutual-funds.

(1) SCR: Solvency capital requirement, the target capital required to absorb the eventual shock caused by a major risk.
(2) MCR: Minimum capital requirement, the minimum level of equity capital below which the competent supervisory authority will automatically intervene.
(3) ORSA: Own Risk and Solvency Assessment is defined in Article 45 of the European Solvency II Directive. ORSA refers to the internal system for evaluating risks and
solvency adopted as an integral part of a company's strategic decision-making process.
(4) EIOPA: European Insurance and Occupational Pensions Authority, one of three European Supervisory Authorities.