Changes in the supervisory system present the insurance industry with many new challenges. By establishing our own enterprise risk management department and implementing numerous other measures, we are, however, well prepared for the introduction of Solvency II.

A new European supervisory system

In 2009, after long negotiations, the European Parliament and European finance ministers reached agreement on a new framework directive for insurance supervision in Europe. Known under the name “Solvency II”, the directive deals with a new European supervisory system that brings fundamental reforms to insurance supervisory law. The goal of the new rules is to ensure that insurance and reinsurance companies are financially sound enough to withstand negative events. The current static system for determining capital adequacy will be replaced by a risk-based system that also takes into account, in particular, qualitative elements. Policyholder protection and the stability of financial markets should be improved at the same time. The new framework directive will also modernise the supervision of insurance groups

Three-pillar approach

Solvency II is based on a three-pillar approach. The first pillar deals with quantitative requirements, and distinguishes between two regulatory capital requirements: the Solvency Capital Requirement (SCR), and the Minimum Capital Requirement (MCR). The second pillar deals with qualitative requirements and concerns the governance system of a company. The third pillar deals with the requirements for reporting to regulatory authorities and disclosure requirements.

QIS Studies

A total of five international Quantitative Impact Studies (QIS studies) were performed to calculate future solvency capital requirements. The goal of these studies is to examine whether the proposed valuation methods are appropriate and feasible, and the findings have, in the end, led to a large number of adjustments. In addition, participation in the field studies offers insurance companies the opportunity to prepare for the new rules and make a close examination of Solvency II.

A challenge for many insurance companies

The new rules, which EU member states must implement by the beginning of 2013, confront insurance companies with new challenges. The changes can be expected to lead to higher capital requirements for many companies.

VIG is very well prepared

During financial year 2009, the Managing Board of the Vienna Insurance Group established a Group-wide project managed centrally from Austria to implement Solvency II on the individual company and Group levels. Based on current requirements and the last QIS findings, the VIG is well prepared for the increased capital requirements under Solvency II at the group and the individual level.

Risk management changes

Due to the split into Wiener Städtische and the Vienna Insurance Group Holding in 2010, changes are needed in risk management. Group-specific aspects of risk management that Wiener Städtische was already dealing with are being reintegrated into the Vienna Insurance Group holding company. A new Group-wide risk management system is currently being built. The enterprise risk management department was established at the beginning of 2010 for this purpose. The department is responsible for Group-wide risk management and reports to the Managing Board as a whole. Its main objectives are further standardisation of risk management structures and processes, and successful implementation of Solvency II in the Vienna Insurance Group. The applicable risk policy is being re-viewed and rolled out across the Group. In addition, Group-wide communications with respect to risk management are moving ahead.

Partial internal model

Intensive work on the development and implementation of a partial internal model is already taking place at both the Group and individual company levels as part of the Solvency II project. Care is being taken to ensure that the necessary calculation models and processes are set up in the Group companies, so that consistent values can be calculated at both the individual company level and Group level. A method paper was prepared during the Solvency II project that provides a detailed description, based on the technical specifications of the Financial Market Authority, of the calculation and valuation methods that must be applied across the Group to calculate the solvency requirement based on the standard Solvency II formula. The solvency requirement based on the standard Solvency II formula will be calculated in parallel with the results from the partial internal model being prepared by the Vienna Insurance Group for two years.

Qualitative risk management

With respect to future qualitative risk management requirements, the Vienna Insurance Group is establishing a uniform governance system appropriate for Solvency II that includes all necessary functions (risk management, compliance, actuarial function, internal auditing). A Group-wide risk inventory system is being implemented. The goal is to develop a consistent and comprehensive Group-wide risk reporting system that allows the risk situation of the Group to be controlled more easily while satisfying the requirements from the ORSA (Own Risk and Solvency Assessment). Internal control systems ensure compliance with the guidelines and requirements produced by the risk management system.

Implementation in VIG

  • Group-wide project for implementing Solvency II already in place since 2009
  • The Enterprise Risk Management department deals extensively with the risk management issues of the Group
  • New Group-wide risk management system being set up
  • Current focus of work on Solvency II: develop and implement a partial internal model and establish a uniform governance system