»Ê¹ÚÌåÓýapp

Regulatory authorities and the market expect an entity with insurance business to have a substantial margin of income-producing assets above its liabilities to policyholders and more than the absolute minimum statutory solvency margin. »Ê¹ÚÌåÓýapp position here is evolving. »Ê¹ÚÌåÓýapp current set of Directives, pending the introduction (expected in 2012) of a new EU framework (Solvency II), is known as Solvency I. In the UK, the Financial Services Authority (FSA) introduced interim standards from 1 January 2005 based on a consultation paper CP190 ‘Enhanced capital requirements and individual capital assessments for non-life insurersâ€� (July 2003).

Solvency I

A ‘required minimum marginâ€� (RMM), a proportion of the technical provisions, is added to the provisions. »Ê¹ÚÌåÓýapp result is larger than the absolute minimum capital, the ‘minimum guarantee fundâ€� (MGF). CP190 made public the FSA’s ‘informal supervisory rule of thumbâ€� that required at least twice the RMM to be added to the provisions.

CP190

Under the ‘three pillar� approach to regulation, originally developed for banking under the Basel Accord

• Pillar 1 is a set of harmonised valuation standards and minimum capital requirements
• Pillar 2 is a supervisory review process, with active regulator participation, ensuring insurers have good processes and adequate capital, involving ‘individual capital guidanceâ€� (ICG) input from the regulator
• Pillar 3 is market disclosure and discipline, allowing comparison across institutions.

»Ê¹ÚÌåÓýapp new risk-based regulatory requirement (enhanced capital requirement, or ECR) for Pillar 1 and individual capital adequacy standards (ICAS) regime are steps towards the standards being developed for Solvency II »Ê¹ÚÌåÓýapp CP190 proposals are now reflected in INSPRU, in succession to PRU (see GIM3120).

Solvency II

Pillars 1 - 3 will be in place across the EU. »Ê¹ÚÌåÓýapp MGF will be replaced by a ‘minimum capital requirementâ€� (MCR) and the ECR by a ‘solvency capital requirementâ€� (SCR), a risk based level of solvency capital which may be topped up (‘adjusted SCRâ€�) through the ICAS process. A Community wide regulatory reporting process will be in place. It is expected that this will comprise

• A public Solvency and Financial Condition Report (SFCR), and
• A private Report to Supervisors (RTS).

»Ê¹ÚÌåÓýappse reports will include quantitative and narrative information supporting the regulatory process, including (for Pillar 2) what is known as an Own Risk and Solvency assessment (ORSA). »Ê¹ÚÌåÓýapp information contained will be useful in assessing capital requirements (while bearing in mind that the supervisory view is not conclusive).

GIM10160+ discusses the relevance of these regulatory capital standards in the light of OECD developments.