The regulations, which are expected to be implemented in 2012, will change the way insurance companies determine their capital requirements and run their businesses.
While the regulations were officially only binding on European insurers, there was a high likelihood that SA would introduce similar rules, Dries de Wet, South African associate director for actuarial services at Ernst & Young, said at the weekend.
“Historically, SA has followed the lead of the European regulators and as such we would expect a South African version of Solvency 2 to be introduced in time,” De Wet said.
“However, it is likely that South African insurers will move initially on their own accord to modify their systems to introduce some aspects of the Solvency 2 regulations on an internal basis. The reason behind this action is partly to pre-empt similar regulations on a local basis and partly to introduce better risk management processes into their own businesses,” he said.
The Solvency 2 framework is intended to replace Solvency 1 rules in place since 2004, which were based on rules in force since the 1970s. However, those rules did not take heed of the advances in risk management over the past few years, nor are they in line with international norms.
Solvency 2 is based on three pillars. Pillar one sets out the rules for measuring the amount of capital each insurer should hold. Pillar two illustrates how risk management and governance should be handled, and the third pillar governs disclosure and transparency requirements.
James Tufts, European actuarial services partner at Ernst & Young, said while the move to introduce new rules had been in the works for a number of years, it went a long way to answering a number of criticisms that had been levelled against the industry in the light of the market turmoil.
“One would like to believe that had the world's insurance companies already been using Solvency 2 regulations, then there would have been significantly more advance warning about the difficulties that some of the international insurance companies were experiencing at the time and the scope of intervention might not have needed to be as dramatic as was sometimes the case,” Tufts said.
He said the new regulations set a number of solvency control levels which, when breached, would alert regulators that a specific level of intervention was needed.
These would range from working with the insurer to restore solvency levels, to “ultimate supervisory action” where its liabilities would be transferred to another insurer and its licence withdrawn.
Source: Business Day
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