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There is more room for development in the Solvency II draft report, says the Association of British Insurers.

Commenting on Peter Skinner's draft report on the European Parliament's Solvency II proposal, Peter Vipond, director of financial regulation and taxation of the ABI, said: "It is an innovative report which supports the directive's risk-based approach. It sets the tone for the way the directive will be voted on in parliament. Mr Skinner has also made some sensible suggestions to strengthen co-operation and mutual trust between regulators. However, there are still areas of further development to be worked on."

The new Solvency II regulatory regime will be formally introduced for insurers and reinsurers in 2010 and is intended to provide a consistent framework for the regulation of insurers and reinsurers across Europe. It follows its predecessor, Solvency I, which was put in place in the early 1970s.

The decision to update Solvency I, came after the stock markets fell sharply during 2002 and 2003 and an increased value was placed on risk management practices and capital allocation. The result was a series of disparate regulations peculiar to individual countries across Europe, resulting in a patchwork of rules.

Mr Skinner's draft Solvency II framework focuses on the European Parliament's draft legislative resolution and highlights the individual role of its three-pillar structure. In his explanatory statement, Mr Skinner said that the main objective of pillar one is to "ensure insurance and reinsurance companies are able to meet their obligation when due, with a 0.5 per cent probability of ruin on a one year time horizon". He added: "The Solvency II framework is structured on a holistic total balance sheet approach, balancing all liabilities with all assets the company needs to hold."

Looking at pillar II, Mr Skinner defined a framework of supervisory control which focuses on internal processes and aspects of operational risk including an effective internal control system, risk management systems, actuarial function, internal audit and rules on outsourcing and on the last pillar. Mr Skinner said the central objective is "the disclosure of information to underpin market discipline, supervisory reporting and transparency requirements".

While welcoming the Commission's proposal as a "positive step towards bringing clarity and legal certainty between regulators and industry", Mr Skinner raised a number of issues, including the role of consumers, eligible own funds, the concept of solo supervisor and the calculation of fair value.