The Final Solvency II Framework: Will It Be Effective?

With Solvency II ready for implementation as per 2016, it is a good time to analyse the effectiveness of the framework. We build on earlier analyses of the preliminary framework dating from 2009. In the meantime many improvements have been implemented. We use 12 criteria to assess the effectiveness of Solvency II, and conclude that overall, Solvency II is effective. Not surprisingly, Solvency II is a major step ahead compared with the current supervisory framework. However, violations to some criteria remain. While some violations are because of simplifications, others are because of a lack of focus on particular risks (government bonds, inflation risk, liquidity risk). To resolve some of these violations, we propose specific prescribed and targeted stress tests through the own risk and solvency assessment and a more detailed focus on the effectiveness of governance structures.