Pillar 2

QUALITATIVE MEASURES

Together with a greater focus on risks and their management, the new Solvency II regime will also adopt a more prospective focus. Whereas at the moment solvency requirements are based on largely historical data, the new rules will require insurers also to think about any future developments, such as new business plans or the possibility of catastrophic events which might affect their financial standing. A new development in this area will be the introduction of the "Own Risk and Solvency Assessment" (ORSA).

Another new requirement is the "Supervisory Review Process" (SRP). The purpose of the SRP is to enable supervisors to better and earlier identify insurers which might be heading for difficulties. Under the SRP, supervisors evaluate insurers' compliance with the laws, regulations and administrative provisions adopted pursuant to this Directive and its implementing measures.

Own Risk and Solvency Assessment

As part of their risk management system, all (re)insurance undertakings must have a regular practice of assessing their overall solvency needs with a view to their specific risk profile, known as the ORSA. The main aim of the ORSA is to identify whether the particular risk profile of an undertaking deviates from the assumptions underlying the regulatory capital calculation (e.g. European Standard Formula).

The ORSA has a twofold nature. It is an internal assessment process within the undertaking and is as such embedded in the strategic decisions of the undertaking. It is also a supervisory tool for the supervisory authorities, which must be informed about the results of the undertaking's ORSA.

The ORSA does not require an undertaking to develop or apply a full or partial internal model. However, if the undertaking already uses an approved full or partial internal model for the calculation of the SCR, the results of the model should be used for the ORSA.

The ORSA does not create a third solvency capital requirement. A deviation between the ORSA and the SCR calculation does not lead to an automatic increase of capital, although this may be the end result.

The ORSA is very specific to the undertaking's risk profile. It should therefore not be too burdensome for small or less complex undertakings.

Corporate Governance
The Framework Directive requires all insurers to have in place an effective system of governance which provides for sound and prudent management, proportionate to the nature, scale and complexity of the firm and its activities.

Firms are required to have in place written policies relating to risk management, internal control, internal audit, and where relevant, outsourcing.

Persons involved in the running of insurance firms will be subject to a ‘fit and proper’ regime.

Risk management
Risk Management is an area of particular focus. Firms are required to have a risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report on a continuous basis the risks (including operational risks) to which a firm could be exposed and the interdependencies involved. The firm needs to have a risk management function that can demonstrably implement the risk management system.

Internal Control/Compliance Function
Firms are likewise required to have an internal control system that at least includes administrative and accounting procedures, an internal control framework, appropriate reporting arrangements and a compliance function.

The Compliance Function is responsible for advising on compliance with laws, regulations and other rules under the Directive.

Internal Audit Function
Insurers are required to have an independent internal audit function responsible for evaluating the adequacy and effectiveness of the internal control system and other elements of the governance system.

Actuarial Function

Insurers are required to have an effective actuarial function to:

coordinate the calculation of technical provisions.
ensure the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions.
assess the sufficiency and quality of the data used in the calculation of technical provisions.
compare best estimates against experience.
inform the administrative or management body of the reliability and adequacy of the calculation of technical provisions.
oversee the calculation of technical provisions in certain cases.
express an opinion on the overall underwriting policy.
express an opinion on the adequacy of reinsurance arrangements.
contribute to the effective implementation of the risk management system, in particular with respect to the risk modelling underlying the calculation of the capital requirements and the ORSA.

The actuarial function shall be carried out by persons who have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the business of the insurance or reinsurance undertaking, and who are able to demonstrate their relevant experience with applicable professional and other standards.