Insurance: Back to basics! Solvency II has you covered

Dear policyholders, put your fears to rest, Solvency II is looking out for you!

Solvency II is a rather cryptic name for what could be considered a “guardian of the insurance galaxy”, and it is using all possible caution to ensure that your insurance company is there for you when an event affects you, no matter how extreme it is.

In concrete terms, Solvency II is a new European regulation requiring insurers to set aside enough reserve capital to be able to cope with just about any disaster.

For the past ten years, the AXA Group has been preparing in depth for this regulatory change. Why such extensive planning? So that AXA would not only fully satisfy European norms, but also take further steps to make its insurance system quasi infallible.

Still need convincing? Enjoy watching this enlightening short film, which we prepared to help our policyholders to better understand how Solvency II works and why it’s important:

The Solvency II supervisory standard is a European Union directive applying to every insurance company in Europe since January 1, 2016.

It introduces new solvency guidelines guaranteeing that insurers will be able to meet their customers’ needs under any circumstances, even in an extraordinary event, such as a natural disaster or a global financial crisis. This standard is more robust than the previous framework, Solvency I, and better protects policyholders, because it applies particularly rigorous economic analysis. European customers are better protected, but so are people around the world, whenever they are customers of an insurance company based in Europe.

If we are to understand Solvency II, we first need to know what insurance company solvency means:

When a customer takes out an insurance policy – whether to protect his or her car, health or savings – the insurance company sets aside a provision, creating reserves that can be used to compensate the policyholder if a loss occurs. To ensure that their clients are very well-protected, even after a disaster event, insurance companies therefore hold a certain amount of available capital.

That’s where Solvency II comes in. The new European regulation assesses all the types of risk that an insurer faces. The level of risk is not the same, for example, when a company provides car insurance, or health insurance, or life insurance. For each kind of risk, Solvency II lays out how much capital the insurer must hold.

Under Solvency II, as a minimum, European insurers must hold enough capital to ensure a “confidence interval” of 99.5% over one year.

Need some explaining? The confidence interval indicates the accuracy of an estimate. In other words, there is only a 0.5% chance each year that the insurer will default on its obligations to its customers – i.e. once every 200 years.

By holding an amount of capital that is twice the level demanded by regulations, AXA is bolstering its solvency beyond the regulatory requirements. The Group has also opted to use an internal model to calculate its solvency, instead of the framework’s standard formula, which offers a rougher determination of the amount of capital to hold. Thanks to this internal model, AXA has a very detailed view of its risks and therefore a better understanding of what might happen in a worst-case scenario.

Here’s a specific example: we regularly calculate what impact major past events would have on our solvency level if they occurred today, such as the global financial crisis of 2008-2009 and the Lothar & Martin storms that ravaged France and western Europe in late December 1999. In all these extreme scenarios, AXA’s regulatory solvency remains solid.