Solvency II, a European Union Directive that regulates the insurance industry in Europe, is built on a framework consisting of three pillars covering solvency capital calculations, governance and reporting respectively, Solvency II is driving the regulatory agenda for most insurers in Europe and increasingly in many countries throughout the rest of the world. The opportunity exists for industry leaders to set their sights on more than just achieving regulatory compliance and to use this new risk-based regulation as a catalyst to help drive business performance with Enterprise Risk Management (ERM).
There are a number of different approaches to Solvency II that insurers can follow - from a standard formula approach to a partial or full internal model. The standard formula approach provides a prescribed means to calculate solvency capital, and while this helps insurers comply with Solvency II, it is considered too restrictive to contribute much additional value. On the other hand, adopting an internal model tailored to their business needs can enable insurers to broaden their
ambitions beyond regulatory compliance and help them achieve competitive advantages by transforming business processes.
This white paper focuses on the practicalities of the internal modeling approach to Solvency II for:
• calculating solvency capital (Pillar 1)
• providing appropriate governance in the calculation process (Pillar 2)
• incorporating the model results into business decisions and stakeholder reporting (Pillars 2 & 3)