Solvency of an Insurance Undertaking

This chapter aims to describe the new approach introduced by European regulations Solvency II. This Directive defines the new criteria for the calculation of solvency margin for an insurance (and reinsurance) undertaking. The new system has three pillars. The first pillar quantifies the capital cover for meeting risks. The second pillar aims to arrange an internal organisation and the adoption of a series of behaviours consistent with a holistic view of risk management. The third pillar discloses the insurance undertaking’s operation transparently to the market. Regarding the first pillar, the reader can learn the steps required by the directive for: (1) calculation of solvency capital requirement (SCR) based on the risks foreseen by the EIOPA’s framework; (2) determination of Own Funds (OF) which are the capital available for covering the SCR; (3) calculation of solvency ratio which is the fraction between OF and SCR (this ratio must be greater than 1.0). The second pillar illustrates a system of governance based on the concept of risk management linked to governance and risk monitoring. The third pillar explains the use of information required for monitoring the actual state of solvency and financial stability overall of the insurance undertakings.