New solvency requirements for insurance undertakings — major step towards safer insurance market, more effective supervision and better consumer protection
The risk-based requirements of the Solvency II Directive for the operation and supervision of insurance undertakings applicable as of 1 January 2016 in Lithuania, as well as in other European Union countries, are more modern and will help ensure the functioning of the single insurance market and a uniform consumer protection level in 28 countries with a total population of almost 500 million.
‘From now on, solvency requirements for insurance undertakings will be uniform in all European Union countries, which means that insurance policy holders will be protected in all countries in a uniform manner. Requirements for the insurer to better assess its risk and manage it, to hold sufficient capital, and disclose more information about its financial position are provided for in order to enhance the protection of users of insurance products — this is the key purpose of Solvency II,’ said Ingrida Šimonytė, Deputy Chair of the Board of the Bank of Lithuania.
Under the new requirements, an insurance undertaking’s solvency ratios will be calculated considering the actual value of its assets and liabilities, and all risks that may arise for the insurance undertaking that may result in contingency losses. Sufficient accumulated capital to cover those losses should help insurers withstand various likely shocks in their operations, financial market downturns, and meet on time their liabilities to insurance policy holders.
In implementing the Solvency II Directive, insurance undertakings will be required to identify risks, assess and manage them, and undertake risk mitigation measures. Good risk management should help strengthen financial undertakings and make their activities more effective; it should also encourage introducing innovations: providing insurance products that are necessary for consumers and the risk of which can be managed.
Solvency II also means increased requirements for information, indicators and explanations to be publicly announced by insurance undertakings, as well as greater insurance market transparency. Higher disclosure requirements will provide insurance product users with more useful information for decision-making. It will be easier to compare the performance indicators of insurance undertakings operating in different European Union countries. The supervisory authority, receiving more information, will be able to react on time and take measures for insurance undertakings to be financially stable.
More information on the requirements of the Solvency II Directive is published on the Bank of Lithuania’s website.