Executive's Guide to Solvency II

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