The EU Single Market's web site dedicates an entire section to Solvency. When it comes to the banks' "cousins"—insurance firms—the solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen events. Solvency margin requirements have been in place since the 1970s and have been amended by the Solvency I Directives in 2002. However, Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry that aims to establish a revised set of EU-wide capital requirements. These requirements should help supervisors protect policyholders' interests more effectively by making prudential failure less likely—reducing the probability of consumer loss or market disruption. Namely, while the Solvency I Directives aimed at revising and updating the current EU solvency regime, the Solvency II project has a much wider scope, since it includes a review of the overall financial position of an insurance undertaking—not just limited to the solvency margin requirement.
Its aim is to ensure adequate policyholder protection in all EU member states, and it will take into account current developments in insurance, risk management, finance techniques, international financial reporting and prudential standards, etc. One key objective is that the requirements better reflect the true risks of an insurance undertaking, as there is widespread recognition that this is not the case in the current system. Another important feature of the new system will be the increased focus on the supervisory review process, with the idea to increase the level of harmonization in general, including that of supervisory methods, tools, and powers. As explained in Solvency 2 on the Financial Services Authority's (FSA's) web site, the framework under development consists of three "pillars," whereby pillar 1 sets out the minimum capital requirements firms will be required to meet for insurance, credit, market and operational risk. Pillar 2 will be the supervisory review process $ because of this, supervisors may decide that a firm should hold additional capital against risks not covered in pillar 1. The aim of pillar 3 disclosures is to harness market discipline by requiring firms to publish certain details of their risks, capital and risk management.
The European Insurance and Occupational Pensions Committee (EIOPC) has approved the new Solvency II regime's basic architecture. It is based on the same three pillar approach as it is for insurance (quantitative requirements; supervisory activities; and reporting and disclosure) and the banking sector. If it is of any consolation, Solvency II is still at an early stage. As discussed in FSA's Solvency 2, before it develops the level 1 framework directive, the European Commission is consolidating the existing solvency regulations and getting technical advice. The Commission expects to publish its formal proposal for a Framework Directive by July 2007, and based on this, one should expect Solvency II to be implemented by 2009/10.
Further on banking and financial institutions regulations, and coming back to the IAS framework, IAS 32 and IAS 39 in particular establish rules for the valuation of financial instruments. Again, in tune with the spirit of IFRS and IAS, accounting systems for financial instruments should enable banks to prepare IAS-compliant financial reports and create parallel financial statements based on a central data pool fed by the existing system landscape.
Thus, appropriate enterprise resource planning (ERP) and financial management systems must provide a comprehensive set of financials and analytics capabilities to meet the requirements of the rating process. Namely, transactional financials capabilities should enable banks to accelerate the preparation and processing of financial information, capture and organize relevant financial data more rapidly, and achieve tighter corporate governance and control. Analytics capabilities should allow banks (and related financial institutions) to automate and optimize corporate planning, analyze internal and external risk factors, integrate business strategy and risk management, and improve transparency and trust. With such sound systems in place, financial institutions should have the tools they need to streamline the company-wide planning and budgeting processes; increase transparency (and thereby avoid planned-versus-actual deviations, and mitigate the changes of uncertain events); get the most out of capital allocations (that is, make smarter investment decisions and improve results through risk-based management); comply with laws and regulations; and implement measures for damage prevention.
Just as with banking, insurance, and other financial institutions, the automotive and the food and drug industries are two areas of business where a growing number of government legislations and safety initiatives require organizations to implement industry-oriented ERP systems in order to ensure compliance. The specifics on how these industries address compliance issues will be looked at in the next installment of this series.
Its aim is to ensure adequate policyholder protection in all EU member states, and it will take into account current developments in insurance, risk management, finance techniques, international financial reporting and prudential standards, etc. One key objective is that the requirements better reflect the true risks of an insurance undertaking, as there is widespread recognition that this is not the case in the current system. Another important feature of the new system will be the increased focus on the supervisory review process, with the idea to increase the level of harmonization in general, including that of supervisory methods, tools, and powers. As explained in Solvency 2 on the Financial Services Authority's (FSA's) web site, the framework under development consists of three "pillars," whereby pillar 1 sets out the minimum capital requirements firms will be required to meet for insurance, credit, market and operational risk. Pillar 2 will be the supervisory review process $ because of this, supervisors may decide that a firm should hold additional capital against risks not covered in pillar 1. The aim of pillar 3 disclosures is to harness market discipline by requiring firms to publish certain details of their risks, capital and risk management.
The European Insurance and Occupational Pensions Committee (EIOPC) has approved the new Solvency II regime's basic architecture. It is based on the same three pillar approach as it is for insurance (quantitative requirements; supervisory activities; and reporting and disclosure) and the banking sector. If it is of any consolation, Solvency II is still at an early stage. As discussed in FSA's Solvency 2, before it develops the level 1 framework directive, the European Commission is consolidating the existing solvency regulations and getting technical advice. The Commission expects to publish its formal proposal for a Framework Directive by July 2007, and based on this, one should expect Solvency II to be implemented by 2009/10.
Further on banking and financial institutions regulations, and coming back to the IAS framework, IAS 32 and IAS 39 in particular establish rules for the valuation of financial instruments. Again, in tune with the spirit of IFRS and IAS, accounting systems for financial instruments should enable banks to prepare IAS-compliant financial reports and create parallel financial statements based on a central data pool fed by the existing system landscape.
Thus, appropriate enterprise resource planning (ERP) and financial management systems must provide a comprehensive set of financials and analytics capabilities to meet the requirements of the rating process. Namely, transactional financials capabilities should enable banks to accelerate the preparation and processing of financial information, capture and organize relevant financial data more rapidly, and achieve tighter corporate governance and control. Analytics capabilities should allow banks (and related financial institutions) to automate and optimize corporate planning, analyze internal and external risk factors, integrate business strategy and risk management, and improve transparency and trust. With such sound systems in place, financial institutions should have the tools they need to streamline the company-wide planning and budgeting processes; increase transparency (and thereby avoid planned-versus-actual deviations, and mitigate the changes of uncertain events); get the most out of capital allocations (that is, make smarter investment decisions and improve results through risk-based management); comply with laws and regulations; and implement measures for damage prevention.
Just as with banking, insurance, and other financial institutions, the automotive and the food and drug industries are two areas of business where a growing number of government legislations and safety initiatives require organizations to implement industry-oriented ERP systems in order to ensure compliance. The specifics on how these industries address compliance issues will be looked at in the next installment of this series.