Pillar 1
Insurers must demonstrate they have sufficient financial resources to meet all potential liabilities.
Pillar 2
Insurers are required to take the Own Risk & Solvency Assessment (ORSA) into consideration.
Pillar 3
Quarterly and annually, insurance companies must provide their local regulator with a suite of reports.
What are the three pillars of Solvency II?
Pillar 1: Demonstrating your business can meet potential liabilities
A risk-responsive capital measure – the Solvency Capital Requirement (SCR) – is calculated to ensure that insurers have a 99.5% probability of fulfilling their obligations for the next year.
The SCR helps insurers plan how much capital they should hold, and whether or not they can afford to continue writing further business.
Pillar 2: Short and long term risk management
The ORSA is evidence of the processes and procedures insurance companies have in place to review short- and long-term risks.
The aim is to determine whether the necessary funds are available for the organisation’s solvency needs.
Pillar 3: Regular Solvency Reporting
In the UK, this is The Bank of England, and they require proof that an insurance company is meeting their Solvency II obligations. This disclosure is necessary for supervisory purposes, and to ensure complete transparency.
Reports such as the Solvency & Financial Condition Report (SFCR) and Quantitative Report Templates (QRTs) are required for submission, both for regulators and the public.
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