Article of EIOPA Chairman on Learning Lessons from Solvency II
EIOPA published an article titled “Learning lessons from Solvency II” by Chairman Gabriel Bernardino. This article, which was originally published in the Enterprise Risk Magazine, highlights that, for insurers, there are lessons to learn in implementing Solvency II. EIOPA discovered this when it undertook the first analysis of progress since the regulations started.
Solvency II requires all insurance and reinsurance companies to have an effective system of governance—including risk management—in place, which is proportional to the nature, scale, and complexity of the business. EIOPA analysis on Own Risk Solvency Assessment (ORSA) shows that, while insurance and reinsurance companies are making good progress in implementation, there is scope for further improvements. The analysis highlights that small insurance businesses tend to face more challenges in implementing and applying ORSA processes. This encourages them to further elaborate on ORSA processes, including their ORSA policy and the quality of data used in assessments.
Additionally, EIOPA has identified the need for a greater involvement of the administrative, management, or supervisory bodies in the ORSA process. EIOPA expects board members to use the ORSA results in their strategic decision-making process to enhance the overall risk management of undertakings. According to ORSA requirements, undertakings should assess all current or potential material risks, including those that are not quantifiable. The findings show that risk assessments do not always include all potential risks and, in many cases, the assessments are not linked to the business model and strategic management actions of the undertaking. Therefore, EIOPA calls on insurers to widen the scope of their risk assessment and to deepen the risk analysis. Furthermore, if any key tasks or functions are outsourced, there should be no negative impact on either the governance system or operational risks.
EIOPA’s analysis also indicates that there is an over-reliance on the standard formula by undertakings. The assessment of the significance of the degree to which risk profiles deviate from the assumptions underlying the solvency capital requirement under the standard formula should be further improved. EIOPA expects all organizations to perform an assessment of their specific risk profile when calculating their overall solvency needs, taking into account the proportionality principle. Finally, there is scope to improve the quality of stress testing, including reverse stress tests and scenarios used in the ORSA assessments. The stress criteria used should enable insurers to evaluate appropriately, in a forward-looking perspective, the potential risks they and their business may be exposed to and the required solvency to manage such risks. While recognizing the steps taken by insurance and reinsurance companies in implementing ORSA, further improvements will help to better embed this risk management tool into business strategy. The article concludes that risk management is an essential function for business planning and strategic decision making. Solvency II and, in particular, ORSA are powerful tools to help companies taking a holistic approach to risk, which, in the longer term, can only serve to benefit consumers and policyholders.
Related Link: Learning Lessons from Solvency II (PDF)
Keywords: Europe, EU, Insurance, Solvency II, ORSA, Risk Management, Governance, EIOPA
Featured Experts
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Brian Robinson
Actuary; risk management specialist; corporate and capital modelling expert
Previous Article
BCBS Study on Range of Practices in Implementing the CCyB PolicyRelated Articles
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
BIS Bulletin Examines Cognitive Limits of Large Language Models
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
ECB is Conducting First Cyber Risk Stress Test for Banks
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
EBA Continues Momentum Toward Strengthening Prudential Rules for Banks
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
EU and UK Agencies Issue Updates on Final Basel III Rules
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards