The implications of Solvency II Pillar II on the system of governance of Maltese insurance companies

Abstract

Title: The Implications of Solvency II Pillar II on the System of Governance of Maltese Insurance Companies Purpose: The objectives of this study are to understand the system of governance requirements emanating from Solvency II Pillar II. Moreover, this study seeks to assess the impact of their implementation on Maltese insurance companies and analyse whether the Maltese industry identified value-added from implementation, and if so, in which areas. Design: In-depth semi-structured interviews were conducted with nine local life, non-life or composite insurance companies, three insurance managers (in so far as they represented foreign owned managed companies set up in Malta), and the Malta Financial Services Authority (MFSA). Findings: The findings of this research show that most companies are close to full compliance to Pillar II. Implementation is having different implications on companies, depending on their nature and size. The large majority of respondents claim they experienced major formalisation in their system of governance. Significant changes were also experienced in risk management and in the introduction of functions required by Pillar II. While a significant number of respondents approached Pillar II as an opportunity to add value, some companies regarded it as simply a compliance exercise. Most value was generally found in risk management areas while least value was found in the introduction or formalisation of the actuarial and internal audit functions. Conclusions: This study concludes that the most significant impact Pillar II has on the system of governance of Maltese companies is on the formalisation of governance arrangements, in the overhaul of the risk management system and on the overall culture of undertakings. It also concludes that the nature and size of undertakings affects the effectiveness and value-adding capabilities of Pillar II. Small to medium local companies had the most positive attitude in this regard. Larger undertakings, especially where they form part of a group, generally found less value in implementation. Value: This research provides a thorough review of the way Pillar II is being implemented in Maltese companies and the impact it is having, as well as the attitude of the Maltese insurance market towards these governance requirements. Recommendations for companies and the regulator are also put forward.