The Solvency II Experts News

On September 25th, the FSA (United Kingdom) published a discussion paper, Insurance Risk Management – the path to Solvency II. In this article, the FSA focuses on the key messages of the discussion paper, providing a high level summary of key considerations for the three Pillars and some additional information in relation to the level of preparedness of the insurance industry in the United Kingdom.

Click here to read entire article.

IT appears like an iceberg on the route to Solvency II: the visible part is a small set of expectations about data and models in the directive and regulatory papers. But underneath this emerging tip, the implications for IT are huge and lead to large efforts to implement new tools and architectures or upgrade the existing ones.

Recognising this reality and starting now to chart a well-informed course for IT: this could be the difference between success and failure in the implementation of Solvency 2 in 2013.
In this article, Michel de La Belliere, Partner at Deloitte Conseil and Aomar Aoulmi, Manager at Deloitte Conseil highlight some of the key IT considerations insurance organisations should think about for a successful implementation of Solvency II.

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In a publication, the CRO forum declared it believed that attention should be paid to the potentially pro-cyclical nature of the Solvency II regulation. In particular, forced sales of assets in market downturns should be discouraged. A decrease in available capital due to distressed market prices for assets should not require immediate regulatory intervention.

The CRO Forum also believes that addressing the potentially pro-cyclical nature of (any) regulatory regime is a more effective way of preventing insurance companies from reducing their exposures to risky assets, in particular equities, compared to an artificial incentive in terms of lower risk capital charges in Pillar 1. For example, the “duration approach” to reduced capital charges for equities in the context of Pillar 1 may still force writers of short-term liabilities out of their equities immediately.

Nevertheless, the duration of the liabilities is an important indicator in the context of pro-cyclicality – in the sense that a long-term business may also be given a longer time to recover from temporarily distressed markets.

The CRO Forum therefore proposes an approach to address both these issues: the pro-cyclicality and the equity treatment, simultaneously through a Pillar 2 solution.

Click here to download full paper.

The French Presidency of the EU has published its Amended proposal for a Directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance, SOLVENCY II – Presidency compromise text.
The document removes the original proposals (subsection 6 within Chapter II of Title II)  on the group support regime.
Click here to download this document.

The CRO Forum issued a publication commenting on the consequences of the financial crisis for Enterprise Risk Management and regulation in the insurance industry. In this publication, the CRO Forum responds to the recent developments in the financial markets, stating that the credit crisis has raised serious questions about the effectiveness and efficiency of risk management within the financial services industry.

This publication, written from an insurance industry perspective, focuses on the implications of the crisis for Enterprise Risk Management (ERM) and regulation in the insurance industry, in particular for Solvency II.

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The CEA, the European insurance and reinsurance federation, is disappointed that the text of the draft Solvency II Framework Directive that will be put to the EU Council of Economic and Finance Ministers for approval on 2 December has removed all mention of the group support regime, which allows for the supervision of insurance groups in line with their economic reality.

“The European insurance industry has always maintained and continues to believe that the group support regime is a fundamental element of Solvency II’s economic risk-based regulatory regime,”

said CEA president Tommy Persson. “The future regulation of Europe’s (re)insurers must reflect their economic reality and that reality for many is that they form part of a larger group.”

Appropriate group supervision ultimately provides increased protection for policyholders through the optimum allocation of insurers’ capital.

CEIOPS published the report on its Fourth Quantitative Impact Study (QIS4). One of the main objectives of QIS4 was to collect detailed information on the impact of the testing proposals on the insurance industry’s balance sheet, in order to help develop Level 2 implementing measures in line with the Level 1 Framework Directive Proposal.

Areas of particular relevance in this exercise were the impact on groups’ balance sheets, including diversification effects and transferability of own funds, the use of simplifications and undertaking-specific parameters, the design and calibration of the MCR, and the comparability of the standard formula and internal models for the calculation of the solvency requirements.

The basic architecture of Solvency II seems to be well received, and various improvements have been made on detailed technical aspects. A decisive factor to the success of the exercise has been the impressive participation rate by the insurance industry, especially of smaller insurers and groups. Participation has shown that the industry is keen to contribute to the further development of the Solvency II framework.

The results of the study show that measured against the level of stress embedded in the QIS4 simulations, as of year end 2007 the European insurance industry appeared to be well capitalized. Under QIS4, the aggregated capital surplus of participating undertakings remains fairly stable.

Click here to read the report.

In order to increase risk transparency – and enforce market discipline – public risk disclosure needs to be harmonised and consistent over time. Undertakings should provide an overview of their main risks, their risk governance framework and their solvency position.

The CRO Forum recommends five key principles for risk disclosure: adopting the group level as reference, leveraging other reporting requirements, disclosing all material risks,
being appropriate to both the risks involved and the needs of the relevant audience, and enabling comparability between undertakings.

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the CEA has published a paper setting out eight key messages from the turmoil from a European insurance industry perspective. The CEA’s director general, Michaela Koller, said: “The European insurance industry has generally shown resilience to the shocks to the global financial system, reflecting the strength of the insurance business model. To ensure that insurers and supervisors have enhanced tools to resist financial crises, Europe’s insurers fully support the move to an economic risk-based regulatory regime as proposed in the Solvency II Framework Directive. ”

The CEA’s paper reiterates the message from the European insurance industry that moving to the proposed Solvency II regime will enhance risk management in insurance companies, improve their capital allocation and strengthen their ability to resist crises such as the current one. It stresses that there should be no delays in implementing the Directive. “International insurance companies should be regulated with enhanced cooperation between supervisors and group-wide supervision,” added Koller. Click here to read this paper

Munich Re recorded an almost 40 per cent drop in profits from £3.2bn in the first quarter of 2007 to £1.9bn in the same period this year, while the company’s insurance business took a 50 per cent cut to £300m from £600m during the same period.

Jörg Schneider, chief finance officer, for Munich Re said he expected further losses, predicting overall end of year profits to be less than £1.6bn.

Andrew Cox, partner and head of risk and regulatory capital for Lane Clark & Peacock, said Solvency II requirements to shore up capital reserves against insurance risks could cause problems for companies losing profits.

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CEIOPS conducted a survey to assess the current level of Risk Management Standards on Assets applicable to insurance and reinsurance undertakings within the European Economic Area (EEA), under the current regulatory framework and in the future Solvency II framework, and to institutions for occupational retirement provision (IORP) under current legislation.

The results from this survey, to which 27 jurisdictions have answered, are presented in chapters 4 and 5 of this report.