On 25 November 2009, the European Parliament and the Council of the European Union adopted Directive 2009/138 / EC, the Solvency II scheme, which aims to restructure the legal framework for the European insurance industry. The Solvency II Directive aims to bring together, in a single mechanism, all the directives regulating the sector, allowing insurers to improve their performance between capital requirements and the risks inherent in the sector.
The EIOPA (European Insurance and Occupational Pensions Authority), an insurance supervisory authority, requires a better legal framework for European markets, which will provide insurers with the tools needed to make the internal market work better.
In this way, EIOPA intends to approximate the laws of all EU Member States, eliminating divergences in national regulators.
Solvency II replaces its predecessor, Solvency I, which was implemented in the 1970s and which already required major restructuring in solvency, valuation, risk analysis and supervision of regulators and insurers themselves.
The original requirements of Solvency I enabled the European Union to implement one of the most competitive insurance markets in the world. The different Member States regulated the market autonomously, but always according to some rules spread throughout the EU. This freedom given to each national regulator made the control exercised by the authorities less rigorous as regards the analysis and assessment of obligations. On the other hand, the capital requirements appropriate to the risk of the insurers were rather rudimentary, with no provision for risk revisions.
Although it paved the way for minimum capital requirements, Solvency I has become obsolete and has not been able to keep up with developments in European markets, giving room for a new set of more stringent rules to come into force.
Solvency II aims at complementing and replacing some of the methodologies and requirements that undermined Solvency I, in particular at the level of a more economic, rather than an accounting, view, allowing better management of the insurance market, encouraging a more efficient supervision of risks inherent in this industry. The main objective is to abandon the different solvency restrictions, adopted individually, and to have a single economic structure based on risk. This need arises from the fact that the risk is inherent in all operations in the insurance market, being dependent on many internal factors as well as on capital itself and its valuation.
Thus, with the entry into force of Solvency II, European insurers are forced to look at their results and implement financial measures to enable more reliable and transparent information to be obtained. A novelty in the face of Solvency I is the introduction of the so-called stress tests, which aim to improve the overall management of insurers as well as determining their capital needs.
With the passage from Solvency I to Solvency II, the EIOPA (European Insurance and Occupational Pensions Authority) aims to:
- Promote greater harmonization and transparency;
- Increase supervision and regulation;
- Improve consumer protection;
- Increase competitiveness;
- Implement adequate capital requirements;
To this end, EIOPA intends to ensure that insurers meet all the necessary conditions to be able to carry on business throughout the EU without any obstacles on the part of regulators regarding the provision of services by foreign insurers in their national territory. In this way, the harmonization introduced with Solvency II will allow better cooperation and recognition between all supervisory bodies in the Member States, ensuring that there is a single system.