Directive 2009/138 The Backbone of the Insurance Supervision

Why "Solvency"?

Directive 2009/138/EC or better known as Solvency II is the cornerstone of insurance regulation in the European Union. While the directive has been in force since January 2010, much of its substance was fully applied in January 2016, allowing national supervisory authorities time to implement the necessary local legislation. The directive consists of four key titles and about 350 articles in its latest revision. 

• Title I is the largest, comprising about 2/3 of the articles distributed across ten chapters. It sets out the general rules for conducting (re-)insurance activities.

• Title II focuses on the compulsory elements of life or non-life insurance contracts offered to individuals. It also mandates the abolition of monopolies in the insurance market and affirms the principle of freedom in setting premium rates.

• Title III addresses the supervision of insurance groups, particularly regarding capital holdings and undertakings sharing risk management functions. It includes provisions for determining solvency capital at the group level and for methods of calculating it. Additionally, it includes rules to prevent the double-counting of eligible own funds for solvency purposes.

• Title IV is dedicated to insurance undertakings in the event of insolvency, a scenario that the entire directive has been designed to prevent. 

As a result, Directive 2009/138/EC is often referred to simply as "Solvency", as the most part of it concerns the solvency of an insurer: on individual level, as a members of a financial group or in a state of insolvency. 

The Actuarial Function

The actuarial function is mostly present in Titles I and III, which outline the provisions for calculating the solvency capital requirement (SCR) both at the individual and group levels. 

At the individual level, Chapter 6 of Title I addresses technical provisions, solvency capital, minimum capital requirements, and eligible own funds. It also outlines some key principles, including:

• Use of appropriate, complete, and accurate data

• Market-consistent data and valuation methods whenever possible

• A 1-in-200 probability of insolvency over a one-year period

• A square root formula for aggregating individual risks

The role of actuaries within insurance undertakings is outlined in Article 48 of Solvency II. While most of the article is primarily concerned with technical reserves, their responsibilities also extend to underwriting policy and solvency calculations.

Solvency II and the Three Pillars

Solvency II is often conceptualized as a framework with three core pillars: capital requirements, governance, and reporting. This comes from the Delegated Regulation (EU) 2015/35 supplementing Solvency II, whose Title I is named “Valuation and risk-based capital requirements (Pillar I), Enhanced governance (Pillar II) and Increased transparency (Pillar III)”. The Delegated Regulation, hereafter denoted by delegated acts or DA, which spans 804 pages in its initial publication, provides extensive detail on the provisions within Solvency II.

The capital requirements under Solvency II and the DA are the result of five years of testing known as the Quantitative Impact Studies (QIS), conducted between 2005 and 2009. In collaboration with a wide range of insurers, European regulators developed a standard formula for the solvency capital requirement (SCR) and calibrated its parameters. Although the DA provides much detail on the standard formula, certain aspects remain at the discretion of actuaries.

Technical Standards and Guidance

In addition to Solvency II and the DA, the European regulator also issues technical standards, opinions, and guidance to ensure proper interpretation, implementation, and compliance with the legislative acts.