The arrival of the Solvency II regulation framework marks an important change for insurance companies operating in the European Union. Using a principle-based regulatory approach, European insurance supervisors have articulated amended solvency requirements around a three-pillar directive.
These requirements include quantitative measures of risk and capital (Pillar 1), qualitative assessments of risk and corporate governance (Pillar 2) and a supervisor reporting and public disclosure framework (Pillar 3). Although these pillars represent different aspects of Solvency II, a core element binds these elements together. It is the need for insurance companies to define a firm-specific governance framework also known as Orsa (own risk and solvency assessment), and to embed enterprise risk management into decision-making processes. Because of its central position, Orsa is often referred to as 'the heart of Solvency II'. In other insurance markets such as Switzerland, a strong corporate governance program is already required (for example, Swiss solvency test). Other countries around the globe may soon follow this trend. For example, the US is introducing its risk management and own risk and solvency assessment (RMORSA) for most US insurers under the Solvency Modernisation Initiative which is expected to come into effect in 2015.
This article looks in more detail at some of the main Solvency II Orsa requirements, and how European insurance companies can use enterprise risk management platforms to support these key management needs.