Solvency II is a new capital-adequacy regime that will apply to insurance firms located within all twenty-seven European Union nations as well as firms in Iceland, Liechtenstein, and Norway. It will provide consistent insurance regulations within the EU as well as these three additional countries. The EU will make this new system effective beginning on January 1, 2013. Solvency II will set out stricter capital requirements and risk-management strategies for insurers than those that currently exist under Solvency I, which was put into place in the early 1970s. Solvency I allowed for insurance firms to apply insurance regulations differently across Europe and did not provide for any risk-management requirements. The goal of this new regime is to reduce the likelihood of disruption to the insurance market and consumer loss. It is also aimed at increasing protection for policyholders.
Solvency II consists of three pillars. Pillar 1 will regulate insurance companies' capital requirements, with the goal of making sure that insurance firms hold enough capital to protect them against risk. Pillar 2 will require increased levels of risk management and governments. Finally, Pillar 3 is aimed at transparency improvements.
Several EU insurance companies have spoken out against Solvency II, arguing that it will harm the industry because it is excessively conservative. On Monday, the heads of four leading insurance firms signed a letter to Michel Barnier, the European Commissioner for Internal Market and Services, demanding changes to Solvency II. They claim that the failure to implement more appropriate reforms could result in instability within the insurance industry, which they claim is a "significant component" of the EU economy. Other critics have previously alleged that Solvency II is overcompensating for fears of another financial crisis and will lead to overcapitalization, which could penalize consumers. Further, insurers argue that they do not hold as much risk as banks do, and therefore should not be subject to the same regulations.