Question

5 Characterize the content (main goals and main instruments) of the Pillar 2 and 3 of the Solvency II reform.

Answer 1

Pillar 2

Pillar 2 imposes higher standards of risk management and governance within a

firm’s organization. This pillar also gives supervisors the greater powers to challenge

their firms on risk management issues. It includes the Own Risk and Solvency

Assessment (ORSA), which requires a firm to undertake its own forward-looking

self-assessment of its risks, corresponding capital requirements, and adequacy of

capital resources etc.

According to this framework , qualitative requirements will be based on three core strategic issues:

1. An overall responsibility of leadership for risk management
2. . A clearly defined risk strategy which is linked to the business strategy
3. An ongoing management and control of the company’s risk-bearing capacity

It consist of the following elements:

• Risk management system: It includes risk management strategies, well defined policies and internal reporting procedures.
• Policy processes and procedures: Effective internal control systems which include administrative and accounting procedures, internal controlling framework etc.
• Key functions: Those of compliance, internal audit, etc.

Pillar 3 :Disclosure and Reporting requirements

Pillar 3 aims for greater levels of transparency for supervisors and the public. There

is a private annual report to supervisors, and a public solvency and financial condition

report that increases the level of disclosure required by firms. Any current returns

will be completely replaced by reports containing core information that firms will

have to make to the regulator on a quarterly and annual basis. This ensures that a

firm’s overall financial position is better represented and includes more up-to-date

information.

Disclosure of information enables supervisory authorities to assess a firm's :

• systems of governance
• Businesses they are pursuing
• risk faced and risk management systems

Firms must produce two key reports :

1. The Solvency and Financial Condition Report (SFCR) – Firms are required to disclose the report publicly and to report it to the local National Competent Authority (NCA) on an annual basis. The SFCR includes both qualitative and quantitative information.

2. The Regulatory Supervisory Report (RSR) – This is a private report to the supervisor and it is not disclosed publicly. Firms submit this report to the NCA in full at least every three years and in summary every year. The RSR includes both qualitative and quantitative information.