The governance of Maltese life assurance companies under Solvency II : benefits and challenges

Abstract

Maltese life assurance companies are currently adapting to Solvency II, the new risk-based regime that, as from 1 January 2016, regulates insurance business within the EU. Like its banking counterpart, Basel III, the Insurance Directive comprises three pillars, which are concerned with ensuring (1) adequate levels of capital within the industry, (2) strong governance, risk management and supervisory practices, and (3) transparency and adequacy of disclosure. The dissertation provides an overview of the new regulation, with emphasis on the second Pillar. It analyses the main differences between current practice and Solvency II requirements, and focuses on the impact that the new regime has had on the corporate governance of Maltese life assurance companies. It also examines how Maltese life assurance companies have set up effective risk management systems and prospective risk identification processes through the Own Risk and Solvency Assessment (ORSA). Regulatory authorities will monitor insurance companies and ensure that governance requirements, as described under Solvency II, are being met. Regulatory authorities will also analyse whether the risk taken on by an insurance company is suitable for its size and nature. The discussion is backed by empirical research based on interviews with local life assurance companies, regulators and auditors. The study shows how such companies have reacted to the proposed changes and how they have prepared to face the new EU directive. Attention was also given to verify whether top management possesses the necessary skills, expertise and integrity to direct a life assurance company under Solvency II requirements. The dissertation concludes by showing that the introduction of Solvency II has had an overall beneficial effect on local life assurance companies, as well as policyholders and the regulator. Other challenges, such as the cost of implementation and the principle of proportionality are discussed further.