Solvency II is a regulatory framework for insurance companies that was implemented in the European Union in 2016. Its primary aim is to ensure the solvency of insurance companies and protect policyholders by requiring companies to hold sufficient capital to cover potential losses. The framework also encourages insurance companies to adopt more sophisticated risk management practices and transparency in reporting.

Under Solvency II, insurance companies are required to assess and manage their risks through a process known as Own Risk and Solvency Assessment (ORSA). ORSA involves identifying potential risks, assessing the likelihood and impact of those risks, and implementing strategies to manage and mitigate them. Insurance companies are also required to maintain a minimum level of capital to protect against insolvency, which is determined through a standardised approach or an internal model that is approved by the regulator.

In addition to ensuring the solvency of insurance companies, Solvency II aims to promote transparency and accountability in the insurance industry. Insurance companies are required to provide detailed reporting on their financial position and risk management practices, which helps to increase investor confidence and improve market stability. The framework also encourages insurers to adopt more sophisticated risk management practices, such as stress testing and scenario analysis, which can help to identify and mitigate potential risks before they materialise.

In summary, Solvency II is a regulatory framework that sets out risk management and capital requirements for insurance companies operating in the European Union. By ensuring the solvency of insurance companies and promoting transparency and accountability in the industry, Solvency II aims to protect policyholders and improve market stability.