FSA and Treasury examine insurance group supervision under Solvency II

Recognising the diversification benefits that can arise between insurance subsidiaries within a group, in November FSA and Treasury published a joint discussion paper on how insurance conglomerates should be managed under Solvency II, the EU project for risk-based prudential regulation of the sector. The authorities set out a clear proposal under which each legal entity in the group would have to hold eligible assets equal to at least the solo minimum capital requirement (MCR), however the solo solvency capital requirement (SCR) would be disapplied as a solvency control level. At the EU-wide level the group would have to satisfy the group SCR, which would include any Pillar 2 capital adjustment (above the minimum capital requirements for credit, market and operational risk under Pillar 1 of Basel 2/Capital Requirements Directive). It would also be required to carry out an own assessment of capital and risk for the group as a whole. The group SCR would be the same as for a solo entity, under which there would be a 1 in 200 probability over the next 12 months that the whole group would become insolvent. At the same time the protection for policyholders in any subsidiary making a loss that left it insolvent would have to be the same as if that business was a solo entity.