“Green light for Solvency II”
VIG implements the European directive with its own partial modelling. The European insurance sector continued to be intensively involved with the introduction of Solvency II in 2015. Insurance company regulatory activities were focused on developing new risk management methods and models appropriate for Solvency II that could go live on 1 January 2016, and with making the necessary adjustments to the IT systems.
One major aspect of Solvency II is the change in capital requirements for insurance companies. Insurance companies must have sufficient capital to allow them to withstand a potential 1-in-200-year loss (capital requirement). The key performance indicator for solvency is the solvency ratio, which reflects the relationship between equity capital and the capital requirement. The equity capital is calculated using an economic balance sheet, and the capital requirement either using a predefined standard formula or using an internal company model. However, the latter requires approval from the supervisory authorities.
Since the standard formula did not adequately reflect VIG’s risk profile, VIG decided to internally model the property and casualty area and real estate investments and to develop a partial model. This complex multi-year project was successfully brought to a conclusion with approval from the supervisory authority for the Group, the Austrian Financial Markets Authority (FMA), at the end of 2015. VIG is the only Austrian company that can boast an approved internal model.
Based on this partial internal model, the solvency ratio is expected to be in the area of 200% at the level of the listed VIG group. This – together with VIG’s rating – confirms that the Group has excellent capital resources which give it sufficient freedom to continue actively pursuing its chosen strategy.
In spite of the high cost of organisational and process-related changes and the strict capital requirements, the introduction of Solvency II was a step in the right direction. In the final analysis, it is concerned with making secure investments with a competitive advantage that provide long-term benefits to customers, the company and shareholders alike.