A straightforward guide to the evolution, benefits, and implementation of Solvency II Providing a guide to the evolution, practice, benefits, and implementation of Solvency II, Executive′s Guide to Solvency II deftly covers this major European regulation which ensures that insurers can meet their risk–based liabilities over a one–year period to a 99.5% certainty. Part of the Wiley and SAS Business series, this book will guide you through Solvency II, especially if you need to understand the subtleties of Solvency II and risk–based capital in basic business language. Among the topics covered in this essential book are:
- Background to Solvency II
- Learning from the Basel Approach
- The Economic Balance Sheet
- Internal Models
- People, Process, and Technology
- Business Benefits of Solvency II
Executive′s Guide to Solvency II has as its aim an explanation for executives, practitioners, consultants, and others interested in the Solvency II process and the implications thereof, to understand how and why the directive originated, what its goals are, and what some of the complexities are. There is an emphasis on what in practice should be leveraged upon to achieve implementation, specifically data, processes, and systems, as well as recognition of the close alignment demanded between actuaries, the risk department, IT, and the business itself.
Table of Contents:
Preface ix
Chapter 1 The Evolution of Insurance 1
Origins of Risk 1
Early Risk Instruments 2
Role of Insurance in Economic Growth and Prosperity 6
Conclusion 8
Chapter 2 Insurers’ Risks 11
Insurable and Uninsurable Events 11
Risk Taxonomy 12
Underwriting Risk 13
Market Risk 22
Credit Risk 25
Operational Risk 27
Liquidity Risk 28
Risk Transfer and Mitigation 30
Conclusion 32
Chapter 3 Solvency II Chronology 33
Need for Insurance Regulations 33
Why Do Insurers Fail? 34
Causes of Failure 36
Initial Solvency Directives 38
Process of the Solvency II Project 44
Conclusion 52
Chapter 4 Learning from the Basel Approach 53
Regulation in the Context of the Credit Crisis 53
Evolution of Banking Regulation 57
Application to Solvency II: Regulation 60
Application to Solvency II: Business Logic 61
Lessons from the Credit Crisis 67
Conclusion 70
Chapter 5 The Solvency II Directive in Brief 71
What Is Solvency II? 71
Solvency II Is Principles-Based 73
Partial and Internal Models 74
Economic Capital 75
The Economic Balance Sheet 76
Structure of the Directive 77
Conclusion 85
Chapter 6 The Economic Balance Sheet 87
Total Balance Sheet Approach 87
Quantitative Stipulations of the Level 1 Text 95
The Standard Formula 100
Non-Life Underwriting Risk Module 104
Market Risk Module 105
Default Risk Module 107
Conclusion 108
Chapter 7 Internal Models 111
Complexity of Implementation 111
Definition and Scope of Internal Models 113
Internal Models Application 114
Tests and Standards 119
Conclusion 128
Chapter 8 People, Process, and Technology 131
Key to a Successful Solvency II Project 131
People 132
Process 135
Technology 137
Conclusion 143
Chapter 9 Business Benefits 145
Regulation Past and Present 145
Benefits of an Enterprise Data Management Framework 148
Benefits of an Economic Balance Sheet 150
Benefits in Perspective 152
Benefits beyond Solvency II 153
Conclusion 154
Notes 157
Glossary 171
Selected References 181
About the Authors 185
Index 187
