Executive's Guide to Solvency II

DAVID BUCKHAM is the founder and president of Monocle Solutions, an international risk assessment and optimization company that provides various products and consulting services by way of intellectual property. JASON WAHL is head of research at Monocle Solutions. His areas of interest include regulation of financial institutions and financial stability. STUART ROSE is Global Insurance Marketing Manager at SAS Institute, a market-leading business intelligence and analytics software vendor. He has worked for a variety of software vendors where he was responsible for marketing, product management, and application development.

• Preface ixChapter 1 The Evolution of Insurance 1Origins of Risk 1Early Risk Instruments 2Role of Insurance in Economic Growth and Prosperity 6Conclusion 8Chapter 2 Insurers’ Risks 11Insurable and Uninsurable Events 11Risk Taxonomy 12Underwriting Risk 13Market Risk 22Credit Risk 25Operational Risk 27Liquidity Risk 28Risk Transfer and Mitigation 30Conclusion 32Chapter 3 Solvency II Chronology 33Need for Insurance Regulations 33Why Do Insurers Fail? 34Causes of Failure 36Initial Solvency Directives 38Process of the Solvency II Project 44Conclusion 52Chapter 4 Learning from the Basel Approach 53Regulation in the Context of the Credit Crisis 53Evolution of Banking Regulation 57Application to Solvency II: Regulation 60Application to Solvency II: Business Logic 61Lessons from the Credit Crisis 67Conclusion 70Chapter 5 The Solvency II Directive in Brief 71What Is Solvency II? 71Solvency II Is Principles-Based 73Partial and Internal Models 74Economic Capital 75The Economic Balance Sheet 76Structure of the Directive 77Conclusion 85Chapter 6 The Economic Balance Sheet 87Total Balance Sheet Approach 87Quantitative Stipulations of the Level 1 Text 95The Standard Formula 100Non-Life Underwriting Risk Module 104Market Risk Module 105Default Risk Module 107Conclusion 108Chapter 7 Internal Models 111Complexity of Implementation 111Definition and Scope of Internal Models 113Internal Models Application 114Tests and Standards 119Conclusion 128Chapter 8 People, Process, and Technology 131Key to a Successful Solvency II Project 131People 132Process 135Technology 137Conclusion 143Chapter 9 Business Benefits 145Regulation Past and Present 145Benefits of an Enterprise Data Management Framework 148Benefits of an Economic Balance Sheet 150Benefits in Perspective 152Benefits beyond Solvency II 153Conclusion 154Notes 157Glossary 171Selected References 181About the Authors 185Index 187