On January 1, 2016, the much-anticipated regulatory regime termed Solvency II is slated to be implemented in the European Union. Solvency II is a directive aimed at codifying and harmonizing EU insurance regulations that are formally approved by the European Parliament and the European Council. At the simplest level, it is a set of standards designed to ensure that European insurance companies maintain sufficient capital to cover their insurance claims. Goals underlying the new regime are protecting policyholders and incentivizing risk management. In furtherance of these objectives, the directive is composed of three “pillars”: (1) quantitative requirements (2) requirements for governance and risk management of insurers and (3) disclosure and transparency requirements.
Although Solvency II is an EU initiative, its impact is expected to extend both to the US market and globally. US insurers, for example, are predicted to reevaluate their internal regulations and risk management practices in order remain competitive with European companies. On a more direct level, it is likely that subsidiaries of European companies located in the US (and vice versa) will be tasked with complying with Solvency II.
What does this mean for policyholders? Solvency II is anticipated to create positive changes in the insurance industry, including fostering greater financial transparency and sounder risk management. However, some scholars caution that the implementation of Solvency II will increase the cost of compliance for insurance companies, leading to higher insurance prices for policyholders.
Stay tuned for more updates and analysis on Solvency II from SDV in the New Year.