New insurance regulations in the European Union (EU) set to take effect in 2014 could soon have a world-wide impact. EU “Solvency II” Directive regulations will require companies that sell insurance in the EU to calculate and report their solvency status (whether they have adequate capital to back up policies) in a manner different  from the “Solvency I” regulations that have been in place since the 1970s.

The Solvency II Directive was prompted by a series of man-made and natural disasters that caught many insurers off guard and left some insured parties with worthless policies. In response, EU regulators took action to tighten solvency regulations and issue updated solvency calculation models and more rigorous reporting and monitoring processes.

The Solvency II requirements are technical and complex, requiring new solvency reporting, auditing, and standards compliance. The new regulations potentially impact the entire organization, from HR to IT—including the way solvency data is managed, calculated, and reported.

With a full portfolio of insurance industry solutions, SAP and its partners have been deeply involved in studying the Solvency II reporting structure. The bottom line : Insurance companies must now meet more stringent standards to prove they have the capital to back up the policies they write.

The three pillars of Solvency II

Solvency II is a risk-based capital framework that contains three pillars: quantification, governance and disclosure.

• Pillar 1 includes standards, formulas, technical provisions, investment rules, and all related quantitative requirements. Standards for capital that the insurer must hold are defined in this pillar.
• Pillar 2  specifies the governance and risk management requirements for both insurers and supervisors of insurers.
• Pillar 3 contains the public disclosure and regulatory reporting requirements. Two reports are mandated: one for public disclosure and one for the supervisory authority, serving different purposes for transparency and monitoring.

The scope of Solvency II requirements impacts the entire company and has definite costs. Reports say that complying with Solvency II in Great Britain alone will cost insurers nearly £2 billion (Economist; May 3, 2012).

Read on the next page: A rapid reporting solution

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