"Solvency II" -- An EU Proposal for the Insurance Industry

Europe's ambitious plans to modernize its regulatory and capital adequacy regime for the insurance industry were discussed at a World Bank-sponsored event last week. More than 50 policy makers and financial and accounting practitioners from Latin America and Caribbean attended. The attached note  summarizes the proposal -- dubbed "Solvency II" -- and discusses the potential impact of the financial crisis on its future.

It's worth noting that the project emphasizes market discipline -- which many seem to have doubts about due to the current crisis -- as an important pillar of regulation. Similarly, it endorses a "market consistent" approach to valuing assets and liabilities, which is advocated by international accounting standards (IFRS). This is an encouraging sign for those who believe that prudential regulation and transparent financial reporting not only can coexist peacefully, but hopefully support one another.