KPMG Solvency II

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  1. What is Solvency II?
    • new regulatory framework for the EU insurance industry
    • adopts a more dynamic risk-based approach 
    • implements a non-zero failure regime with 0.5% probability of failure
  2. Objectives of Solvency II
    • align economic and reg capital; recognize diversification within and between companies
    • freedom for companies to choose own risk profile and match it with appropriate capital
    • early warning system for deterioration in solvency by active capital management
  3. 3 pillars of Solvency II
    • risk strategy and appetite: quantitative requirements; use standard or internal model
    • monitoring: qualitative requirements; gives supervisors greater power to challenge firms
    • reporting: disclosure requirements; more transparency for supervisors and the public
  4. U.S. (RBC) vs EU (Solvency II) systems
    • methodology - static factor model vs dynamic cash-flow model
    • U.S. is rule based vs EU principle based
    • U.S. does not have a total balance sheet approach; uses book instead of market value
    • U.S. does not use any risk measure, while EU uses VaR at the 99.5% confidence level
  5. Benefits of Solvency II
    • level the playing field ensuring consistent regulation in all territories (one EU license)
    • improve solvency of the industry, meaning better protection for customers
    • better capital management by aligning solvency with risk profile of each firm
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KPMG Solvency II
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