Alternative Investment Management Association
In December 2009, Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (recast), (Solvency II), was published in the Official Journal of the European Union. Solvency II updates the regulatory regime for European insurance and reinsurance firms by replacing a previous series of 13 EU Directives (Solvency I) with a new risk-based regulatory framework to increase protection for policyholders.
Solvency II is structured across three 'pillars' - (1) quantification; (2) governance; and (3) disclosure - and includes requirements for insurance companies to:
meet a Minimum Capital Requirement (MCR) below which a firm may lose its regulatory authorisation;
meet a Solvency Capital Requirement (SCR) below which an insurance firm will be investigated by its market regulator and will be required to take corrective action;
calculate its MCR and SCR based on its insurance liabilities, available own funds (assets) and the presence of certain risks, including operational and market risks;
have a ‘prudent person approach to investment’, opening up the classes of assets in which insurance companies can invest;
undertake extensive reporting to the market and to market regulators; and
implement governance procedures and systems and controls to manage their businesses and their risks, including requirements on controlling and understanding outsourced functions.
Solvency II poses certain challenges for hedge fund managers which receive allocations from EU insurance companies. The Pillar 1 capital requirements impose onerous capital standards upon insurance companies which use the ‘standard model’ for their allocations to hedge funds, and the data reporting requirements under Pillars 1 and 3 will demand significant amounts of investment level data to be delivered to insurance companies by fund managers in a very short space of time.
The Level II measures under Solvency II are currently pending the adoption of an additional Directive - known as ‘Omnibus II’ - which will contain transitional measures to reconcile Solvency II with the new European supervisory architecture introduced by the Treaty of Lisbon. Negotiations on Omnibus II, however, are currently suspended until the completion of a technical impact assessment on the Long Term Guarantee Package which was launched by EIOPA on 28 January 2013.
In September 2012, however, Directive 2012/23/EC was adopted which defers the date of transposition and application of Solvency II to 30 June 2013 and 1 January 2014, respectively.
Level I Text of Solvency II (December 2009)
Note on the Solvency II Directive (April 2010)