What does Solvency 2 mean for health insurance advisers?

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Solvency 2 will soon be upon us. It will come into effect from January 1, 2016 and has serious implications for product providers and financial advisers. The EU has been considering this new piece of financial regulation since the turn of the millennium.  There was some initial uncertainty as to how it would apply in the health cash plan market.  However, Health Shield, working with its actuarial advisers, realised very early on that there would be significant change that affects both providers and advisers.  Below is a summary of the key points.

Solvency 2 is an EU Directive that is designed to harmonise EU insurance regulation across member states, in particular the amount of capital that EU insurance companies must hold to reduce their risk of insolvency. There are three main pillars:

Pillar 1 consists of the quantitative requirements (such as the amount of capital an insurer should hold).

Pillar 2 sets out requirements for the governance and risk management of insurers, in particular the Own Risk and Solvency Assessment (ORSA) process.

Pillar 3 focuses on the requirements for disclosure and transparency.

So what does this mean for advisers? One of the key benefits is that products must be designed with consumer focus in mind.  This means more stable pricing as insurers better understand the underlying risks and look to create a more stable inflow of income.

Demonstrating good conduct means that insurers need to be able to justify why new products are being brought to market or why changes are being made to existing products.  In simple terms changes should be made with the consumer in mind and not simply linked to financials.

In addition, much of the reasoning behind harmonising regulation through Solvency 2 is to promote confidence in the financial stability of the insurance sector and provide early warning to supervisors so that they can intervene promptly if capital falls below the required level. It also offers greater protection for consumers and should reduce the risk of an insurer not being able to meet claims.

 

A company that is compliant will have put in place a robust framework that analyses their risks and will have increased their in-house expertise of risk analysis to help them do so.

At Health Shield we very much welcome this regulation. It forces insurers to imbed actuarial expertise, long term planning and greater transparency into their product design and financial planning process. Companies will need to explain where they are holding their capital, why they have made their decisions and the associated risks behind those decisions. For example, if a firm’s Board increased the risk exposure within its investment strategy it would need to justify the reasons, explain the additional capital requirements to stakeholders and perform thorough sensitivity and scenario testing to ensure the risk taken is not beyond the insurer’s risk appetite.

Health Shield has been planning for Solvency 2 for a long time, investing heavily in its product development, risk management and actuarial capabilities.  In November 2014 it produced its first ORSA report and since 2012 all business and capital planning has used five year Solvency 2 projections combined with a variety of stress and scenario tests to see what would happen in different, turbulent times. We believe it is right that financial firms have to submit themselves to this type of rigorous testing.  Consumers must be made to feel reassured that the companies they buy products from are strong enough to deliver on their promises and that the products they buy are designed with their needs in mind.

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