The importance of risk management in the insurance industry is evident in the Solvency II Directive which (once implemented) will mark a radical overhaul to the regulatory landscape for re/insurance undertakings, with the establishment of the “three pillar” system which adopts a risk based approach and which seeks to ensure that re/insurance undertakings are adequately capitalised and that risks are sufficiently measured.

While the implementation date for the Solvency II Directive is still uncertain (1st January 2016 is the current implementation date, however it is possible that this be postponed to early 2017), the European Insurance and Occupational Pensions Authority (“EIOPA”) has issued interim measures and guidelines which are to be adopted by competent authorities (including the Malta Financial Services Authority (“MFSA”)) from the 1st of January 2014.  This means that certain provisions of the Solvency II Directive will be implemented by the MFSA and will therefore apply to local re/insurers come the beginning of 2014.  While the Pillar I capital requirements are excluded from the scope of the interim measures (with the exception of the pre-application of the internal model) much of the Pillar II system of governance requirements and the Pillar III reporting and transparency requirements will be implemented by the start of next year.

This means that the local insurance market faces a sturdy task in order to be compliant with these requirements by the 1st January 2014 deadline.  For instance, come 2014, all local re/insurers will be required to have a proper and effective system of governance in place, and will have to implement the risk management, internal control, internal audit and actuarial functions.  In addition, the manner in which are/insurer’s assets are invested will change, as re/insurers are expected to invest their assets in accordance with the ‘prudent person’ principle’, in the interests of their policyholders and in a way which ensures the security, profitability, liquidity and quality of their investments.

Furthermore, the board of directors of all local re/insurance undertakings will be required to carry out an own risk and solvency assessment of the undertaking on a regular and habitual basis to ensure that the undertaking has sufficient capital and financial resources to meet its obligations on an on-going basis.

From 1st January 2014 all local re/insurers will see a sizeable increase in their reporting requirements, whether to the MFSA or to the general public.  In fact, the interim measures require numerous and regular reporting by all re/insurers, whether in relation to their financial position, capital requirements, solvency position or general information regarding their undertaking.  This will result in a considerable (and costly) change for the local market.

The question is whether local re/insurers are aware of the changes that are upon them once these interim measures are in force, and whether they have fully grasped the implications that these changes may have on their undertaking.  If the answer is an affirmative one, then these re/insurers should ensure that their processes, systems and procedures are adequate and in line with the requirements of both Pillar II and Pillar III of the Solvency II Directive.

This article was published in The Times Business on the 20th June 2013.