FSI Publishes Paper on Proportionality in Insurance Solvency Rules

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.

Related Links

• Notification
• Paper (PDF)

Keywords: International, Insurance, Solvency Requirements, Proportionality, Regulatory Requirements, Solvency II, FSI