Challenges for Serbia's insurance market on the path to solvency II

Abstract

Insurance and reinsurance companies face a wider range of risks than just those associated with insurance itself. The experience of the European insurance market reveals that several solvency issues in insurance companies stem from risks not directly related to insurance, but rather from market-related factors such as counterparty problems or internal failures like poorly organized processes and employee errors. The realization that solvency, a crucial indicator in which the majority of stakeholders are interested, is influenced by a wide array of risks prompted the transition from Solvency I to Solvency II regulation. The primary focus of this process was to enhance the level of protection for the interests of insurance beneficiaries in the broadest sense. This paper highlights the key advantages of the new solvency calculation regulatory framework, particularly in terms of facilitating more comprehensive risk assessment and individualization. Under this framework, an entity's risk profile is no longer solely determined by factors such as the volume of insurance premiums, settled claims, and technical provisions. Instead, it is influenced by a multitude of factors including business segmentation, contract term, maturity of insurance premiums, sums insured, investment structure, creditworthiness of creditors, internal statistics and experiences, and risk correlation, among others. Additionally, this paper assesses the effects of the Solvency II Directive on the EU market, eight years since its implementation, highlighting both its successes and areas for improvement. Furthermore, it examines the comparative and gap analysis of regulatory frameworks between the Republic of Serbia and the EU market. Drawing on the experience of European countries that adopted Solvency II, this section identifies key areas that will pose challenges for Serbia's insurance market in harmonizing with the Directive's new framework for calculating solvency capital requirements and solvency ratios. Given the significant lead time available for Solvency II implementation, the Serbian insurance sector should utilize this opportunity to address systemic challenges through a multi-pronged approach: gradual legal adjustments, quantitative impact studies, business optimization, learning on the experience of countries of regions that have already gone through the subject process, i.e. through development and transfer of knowledge.