Solvency II is a new set of EU-wide requirements for financial strength, risk management and financial reporting standards that will replace all existing national-specific solvency regimes. Its objectives are to improve protection for policyholders, increase transparency of the insurance industry, and ensure that sound risk management practices are at the heart of every decision-making process.
The fundamental requirements of Solvency II can be classified into three pillars:
Pillar I focuses on rigorous stress tests and capital requirements to ensure that insurance companies can survive a range of economic and non-economic shocks.
Pillar II focuses on increased governance and requires a culture of sound risk management.
Pillar III imposes significant requirements on reporting and disclosure, both to the regulator and to the public.
What does this mean for the insurance industry?
The new regime will bring many changes to the insurance industry. Solvency II requires insurers to have a better understanding of the risks they face. This has, in many cases, required insurers to challenge their existing risk culture and revisit how they assess the risks involved in any new projects or investments.
There is also a requirement to consider business decisions from a capital perspective. The way that capital requirements are assessed will be standardised across the industry according to a detailed set of specifications. There have been several delays in finalising these specifications, and reaching agreement across the EU. Because of this, insurers have been unable to finalise their programmes and have had to constantly evolve according to the ever-changing requirements.
There are also implications for systems and data as a result of the tight deadlines and reporting and disclosure requirements of Pillar III. As a result many companies have had to make significant investments in IT infrastructure and reporting processes.
What does this mean for Lombard International Assurance?
We have been regularly assessing our solvency position according to the new requirements of Pillar I, and have submitted a formal valuation to our regulator three times based on previous year-end positions. We have shown a strong level of solvency on this basis. In addition to this, we have analysed the impact of our ambitious plans for growth, and this supports a high level of solvency in the future.
The programme budget is in line with expectations.
- We have benefitted from synergies with other corporate projects such as Xentis, our new asset data warehouse, and previous investments in internal reporting systems.
- We have strengthened our risk management processes and capability to manage and proactively address risks as well as opportunities.
- We have also had regular input on market practice from our “big four” delivery partners.
- We have shown strong performance relative to the local market in which we are the market leader.
The key areas we are currently focussing on:
What does this mean for our partners and clients?
- Further embedding our risk framework and aligning this with the objectives of our new owner, Blackstone.
- Streamlining our reporting processes.
There has been some discussion in the press regarding asset allocation under the new regime. Based on our knowledge today, we do not intend to alter our current market specific asset allocation approach.
Following our submissions to the regulator, we have received positive feedback on our progress to date. Clients can be assured that Lombard International Assurance will be in a strong and stable position when the new regulations come into force.