Five things you should know about Solvency II: part 4

Solvency II non-compliance can have an impact on an insurer in two different ways. First, if an insurance company does not meet a designated milestone or fails to implement adequate risk management processes, non-compliance could endanger its right to trade.

Alternatively, regulators will scrutinise both the minimum capital requirement (MCR) and the solvency capital requirement (SCR) submitted for each insurer to determine whether there is adequate capital on hand to cover the insurer’s risk.

Should an insurer's available resources fall below the SCR, supervisors are required to take action to restore the insurer’s finances to the SCR level as soon as possible.

If the insurer’s financial situation continues to deteriorate, supervisory intervention will intensify.

Penalty scheme

Ultimately, supervisors will have the authority to impose serious penalties on insurers that fail to comply. If deficiencies in governance are identified, they may impose additional capital requirements to the SCR.

The aim of this supervisory ladder of intervention is to identify and stop ailing insurers before they become a serious threat to policyholders' interests.

If, despite supervisory intervention, the available resources of the insurer fall below the MCR, “ultimate supervisory action” will be triggered.

In other words, the insurer's liabilities will be transferred to another insurer and the licence of the insurer will be withdrawn or the insurer will be closed to new business and its in-force business liquidated..

Petra Wildemann is the global director of Actuarial and Solvency II Consulting Services for the SunGard platform, iWorks Prophet. Petra has extensive international experience in the insurance industry and has delivered large-scale global business and transformation programmes with Accenture, FJA and IBM and insurance customers worldwide. Prior to joining SunGard, she worked for six years at Hewlett Packard as the worldwide director for the insurance business.