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Understanding the Solvency II Directive
By Matthew Streeter CFA | October 17, 2014

It isn't new to hear life insurers talking about Solvency requirements in Europe and Latin America, but recent updates, such as the Solvency II Directive Delegated Act, upcoming internal model approvals, and early 2016 implementation deadlines are now the forefront of many management team discussions, globally.

One important aspect for insurers is understanding the impact the Solvency II Directive Delegated Act is having on the Solvency Capital Ratio (SCR). This part of the directive focuses on how capital requirements are putting a greater focus on risk management and disclosure. It is clear that firms with better risk controls will have a strategic cost advantage. For instance, life insurers can model their capacity to match asset and liability cash flows under a stressed interest rate environment to more effectively minimize capital requirements. Meanwhile, the introduction of economic risk-based capital requirements under Solvency II are leading insurers to not only focus on 99.5% Value-at-Risk (VaR), but also on optimizing balance sheet usage and minimizing their capital charge. When insurance firms can prove that asset proceeds continue to match liabilities under stressed scenarios, is has been proven this capital charge can be minimized.

To learn more about Solvency II compliance requirements and how life insurers are implementing leading risk management processes and controls, please view the recent Solvency II webinar hosted by FINCAD. FINCAD Solvency II webinar .