The EU began its fundamental review of solvency in May 2001. The Commission looked at the effectiveness of the current European solvency system, how the current supervisors could prevent, detect and cure problems, and what the typical insolvency warning signals were. The result of the review supported the need to create a regulation that would tackle the "full causal chain," and to have supervisory tools to focus on company management and how they manage risk."The Solvency II system is based on the European Basel three-pillar banking model," says Morag Fullilove, principal for Fullilove Consulting Group, Chicago and Brussels, Belgium.

"Pillar I examines what the capital requirements are. Pillar II looks at supervisory activities and company management and Pillar III addresses reporting and public disclosure," says Fullilove. "In addition, it has been made clear already that valuation rules, supervisory reporting, and public disclosure under Solvency II should be based on the public accounting rules of the International Accounting Standards Board (IASB), which are in use in Europe, rather than a separate statutory system as in the U.S."

Fullilove adds that on the flip side, the EU has indicated that Solvency II should not contain too many proscriptive regulations, that it should avoid inordinate complications and it should reflect market developments. But Solvency II will probably require disclosure of internal governance provisions, risk models, scenario testing, and other internal procedures as well as financial and investment information.

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