FSI published a paper on proportionality in the application of insurance solvency requirements. This paper is based on a survey of 16 insurance authorities, of which eight have adopted a proportionate approach, thus allowing certain insurers to apply simplified regulatory requirements. The paper describes how the authorities identify insurers that are eligible for simplified solvency rules and also provides specific examples. This analysis provides insights on the key issues that the relevant authorities may need to consider in adopting a proportionate approach to the application of solvency requirements.
The paper notes that insurance authorities have increasingly been taking a risk-based approach to prudential regulation and supervision, since the 1990s. In the process, the complexity of solvency requirements has increased significantly. Against this backdrop, some jurisdictions have taken a proportionate approach in applying such requirements. Under this type of regime, smaller or less complex insurers are eligible for simplified solvency rules, provided that the core prudential objectives of protecting policyholders' interests and maintaining financial stability are not compromised.
To develop a sound proportionate solvency framework, insurance regulators need to consider several critical issues. These include the extent to which simplified regulatory requirements may weaken incentives for insurers to manage their business properly, the trade-off between simplification and risk-sensitivity, and the absolute minimum level of complexity that may be needed to achieve prudential objectives. In addition, insurers should not be able to cherry-pick between the standard and proportionate requirements.
Keywords: International, Insurance, Solvency Requirements, Proportionality, Regulatory Requirements, Solvency II, FSI
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