Big changes from Brussels

The main goals of the European Union are to increase policyholder protection and standardise regulatory practice in Europe. Uniform capital, risk management and reporting requirements are being introduced for insurance companies to realise these objectives and reduce the probability of insurance company insolvency. What challenges does this present for VIG? An assessment.

The starting point for this large-scale EU legislative project was back in 1999. The EU framework directive was approved ten years later and greater detail has been added since then. Solvency II is scheduled to come into effect on 1 January 2016, and must be transposed into national law for this to take place. That summarises the status of the legislation.

What is changing?

Compared to the current provisions of Solvency I, one of the changes introduced by Solvency II is a new definition for calculating regulatory capital requirements. What is the minimum capital that an insurance company has to have in order to guarantee its continued existence as a going concern and, in particular, its ability to fulfil its obligations at all times?

Answering this question is not entirely simple. Capital requirements can be calculated using a standard regulatory model or a custom-designed (full or partial) internal model that allows realistic modelling of a company’s individual risk profile. Feeling that the standard model offers too little detail in many respects, VIG decided to develop a partial internal model. The standard model fails to capture the current situation of our company in the property and casualty business and for the real estate investments, while our in-house model accurately reflects our risk profile. The benefits are clear. The newly implemented risk management systems will contribute greatly to company and group management in the future and thus will also strengthen VIG’s market position.

Three-pillar approach

A three-pillar approach is used that I will briefly describe. The first pillar defines quantitative requirements for insurance companies. Its core provisions concern the calculation of capital requirements. A key figure referred to as the solvency ratio expresses actual capital resources as a percentage of the calculated capital requirement. The solvency ratio must be significantly greater than 100%. Falling below this threshold would seriously endanger policyholder interests, and regulatory measures would be taken as a result.

The second pillar consists of qualitative requirements for the business organisation of insurance companies. General governance principles are strengthened by key functions. This includes further strengthening of long-established core functions, from actuarial and compliance-related processes all the way to risk management and internal audit. One of the key responsibilities of risk management includes conducting an Own Risk and Solvency Assessment (ORSA) at least once a year, essentially an annual performance test with respect to the defined business and risk strategy. All units naturally take part. This is quite appropriate and fully consistent with the established practices of our company.

The third pillar essentially defines company reporting requirements, including both regulatory reporting and reporting to the public. A Solvency and Financial Condition Report (SFCR) is required each year, and a Regular Supervisory Report (RSR) is required at a minimum every three years. The main component is quantitative reporting – thousands of data fields covering every business area. It’s also a mammoth undertaking in terms of IT.

VIG is well-prepared

Solvency II presents great challenges for VIG. We therefore launched a Group-wide project five years ago that is centrally managed from Austria and will ensure that we are well prepared. Uniform guidelines, calculation and reporting procedures and the necessary risk-management processes were defined and implemented, with the active assistance of experts in our VIG companies.

We are also working hard on a partial internal model, which is preevaluated by the supervisory authorities in the so-called Colleges. VIG strives for timely approval. In summary, VIG is excellently prepared thanks to efficient risk management and our capital strength. Solvency II nevertheless still requires careful attention and will continue to provide us with new challenges and insights in future years.