Comment: Practical considerations are compromising Solvency II methodology

A number of politically-inspired compromises have led the Solvency II directive away from its market-consistent routes – so much so that according to Barrie & Hibbert’s Craig Turnbull and John Hibbert, the final confidence level for some liabilities is not one in 200, but one in 12

Solvency II (SII) is intended to be an economically rigorous, principle-based capital requirements framework. It aspires to apply market-consistent valuation methods to an insurer’s liabilities and principle-based stochastic methods for assessing one-year 99.5th Value-at-Risk solvency capital. However, the process of transforming Solvency II from a set of high-level principles into a workable regulatory system now appear to have resulted in compromises in the emerging methodology. As a