The term 'Solvency II ' describes the legislative framework for a new solvency and supervisory regime for insurers and reinsurers in the EU. 
 
Solvency II is a forward-looking risk-based capital regime which was implemented across the EEA from 1 January 2016. Solvency II replaces the previous Solvency I regime (set out in various separate insurance and reinsurance directives) which required insurers to use a formula-based approach when calculating solvency requirements rather than assessing individual risks.

Solvency II uses a market consistent approach to value insurers' assets and liabilities, i.e. the price at which a willing buyer would take them.

The regime applies to most insurers and reinsurers with head offices in the EEA. The Solvency II directive is a 'maximum harmonisation' directive aiming to implement a consistent regulatory framework across the EEA. The directive is supplemented by a Delegated Act  – an EU Regulation which is directly applicable in each EEA state. The regime is also supported by Technical Standards which are directly applicable and guidelines produced by the European Insurance and Occupational Pensions Authority (EIOPA) which apply to member states on a 'comply or explain' basis.

The Solvency II framework is broadly structured into three pillars: quantitative requirements (Pillar 1); qualitative requirements and supervisory review (Pillar 2); and transparency requirements (reporting and disclosure) (Pillar 3). 

Objectives

According to the European Commission, the objectives of Solvency II are to improve consumer protection - ensuring a uniform and enhanced level of policyholder protection across the EU;

• modernise supervision - the “Supervisory Review Process” will shift supervisors’ to evaluate insurers’ risk profiles and the quality of their risk management and governance systems;

• improve group supervision - insurance groups would have a dedicated 'group supervisor' that would enable better monitoring of the group as a whole;  

• deepen market integration - by eliminating the differences in the national rules that Member States apply to (re)insurance companies; 

• increase the international competitiveness of European insurers – by improving the operation of the single market by laying down coordinated rules on the supervision of insurance groups.