Pillar II of Solvency II

René Doff

This chapter will discuss the second pillar of Solvency II. This pillar is centred around governance and the responsibility of the board of directors for risk management. There are three important aspects of Pillar II. First, insurers are expected to implement a number of governance arrangements in order to ensure that risks are properly managed. This includes the requirement to install four key functions in the organisation. Second, insurers are expected to make an internal assessment of the most important risks, the ORSA. Third, insurers are expected to make a risk appetite statement, by which it expresses the amounts of risks it is prepared to run. We will discuss each of these requirements in turn, and examine how they are implemented in practice.

PRINCIPLES OF PILLAR II

The main important principle of Pillar II is the own responsibility of the board of directors for risk management. While this may sound obvious, it is still good to make it explicit. In the Pillar II philosophy, the “bare” capital requirements of Pillar I are a basis from which the board of directors should further build its views on risks and the necessary capital position. The board of directors should

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