Positive news from CEIOPS as capital charges softened

Insurance industry representative groups such as the Geneva Association and Comité Européen des Assurances (CEA) have recently stepped up their lobbying efforts to convince finance ministers and supervisors that the sector does not pose anywhere near the systemic risk that the banking sector does and that overall it weathered the recent economic storm very well.

Insurance buyers’ representative groups such as FERMA have strongly backed the insurers efforts because they fear that stronger capital requirements imposed upon the insurers because of a perceived threat of greater systemic risk would simply lead to a reduction in capacity offered and higher prices for all.

hide

The debate has focused upon Solvency II, Europe’s planned new capital adequacy regime. This is because CEIOPS, the body that advises the European Commission on the details, appeared to have caved in to political pressure and raised capital charges for key elements such as premium risk, underwriting risk, correlations and catastrophe risk by double in many cases in its latest set of proposals late last year.

Last week, however, CEIOPS announced its final set of Level II Implementing Measures that included key areas such as non-life underwriting risk, health underwriting risk and the calibrations for the Minimum Capital Requirement (MCR) which appeared to signal a relaxation in the proposals.

The Committee had, for example, been widely criticised by insurers for failing to take a consolidated view of the impact of its wide range of complex proposals on the sector, particularly as it prepares to carry out its final quantitative impact study – in the second half of this year.

CEIOPS said that it would now carry out a detailed assessment of the overall impact of the planned Directive that would not just focus on capital requirements.

“CEIOPS underlines the need to have a view of the overall impact of the Solvency II framework, and therefore will be assessing the impact of the proposed changes in the specifications for QIS5 not only on capital requirements, but also on the calculation of technical provisions and on the level of own funds,” said CEIOPS Chairman Gabriel Bernadino, in his covering letter to Jörgen Holmquist, Director General of the Internal Market and Services Directorate General of the European Commission, as he presented the latest set of advice.

Significantly Mr. Bernadino also said: “The preliminary analysis shows that the solvency capital requirements will increase compared to QIS4 (the previous quantitative impact study that was based on less harsh assumptions). At the same time, the proposed changes in the specifications are expected to lead to a decrease in the required level of technical provisions. For the purpose of QIS5, we also expect the results to be impacted by the developments in the financial markets in the course of 2008 and 2009.”

CEIOPS warned that it would like to point out that there are ‘severe caveats’ to carrying out this preliminary analysis. “By no means should this impact assessment be seen as pre-empting the outcome of QIS5,” said Mr. Bernadino. But, despite this, the insurance industry will welcome this scrap of good news after things seemed to have gone from bad to worse at CEIOPS over the last few months.

The latest set of papers from CEIOPS was delivered after the Commissions agreed that CEIOPS needed to carry out further work in the key areas of non-life underwriting risk, health underwriting risk and the MCR calibration, “in order to put forward timely proposals for QIS5,” explained Mr. Bernadino.

CEIOPS has also been criticised for basing its core calculations on too narrow a sample of data gathered from too few countries and for failing to adequately listen to and talk with stakeholders.

Mr. Bernadino said that to complete its latest work on non-life underwriting risk it had undertaken a ‘major effort’ to collect further evidence from as wide a range of Member States (15 in all) and types of undertakings within the EEA as possible in order to revise the calibration.

“In carrying out this analysis, CEIOPS has engaged in fruitful discussions with stakeholders and has supplemented the analysis by taking into account the results of additional exercises provided by the industry,” he said.

Moreover, Mr. Bernadino said that CEIOPS supports the further improvement of its data collection and technical analysis to help refine the calibrations. To this end, it (CEIOPS) will continue to collect data, and considers that it is important in this area to engage in a constructive dialogue with the insurance industry to further improve the specifications,” he said.

Mr. Bernadino said that CEIOPS has, for example, discussed ‘concrete suggestions’ to allow non-proportional reinsurance in the capital charge for premium risk. CEIOPS has therefore developed a proposal to identify adjustment factors that recognise the risk-mitigation effects of non-proportional coverage.

These new ‘concrete suggestions’ would have clear capital relief benefits for buyers of such reinsurance and also would please the providers of the cover as it could boost, or at least maintain, demand for the cover.

The latest advice also includes proposals based on work carried out since September 2009, also in cooperation with the industry, for the development of standardised catastrophe scenarios.

Mr. Bernadino said that these scenarios aim to provide a more risk-sensitive assessment of catastrophe scenarios in non-life and health insurance and that the full range of scenarios will be tested for the first time in QIS5.

For the health insurance market, CEIOPS said that it has ‘engaged’ with the industry to discuss the design and calibration of the health underwriting risk module, and has included a proposal for the recognition of health insurance pooling arrangements in the calibration. A number of calibrations in this area have either been reduced or removed.

“CEIOPS has invited the industry to bring forward a global approach which would allow for the harmonised treatment of health across different markets. Further improvements to the calibration have been made in the final advice,” stated Mr. Bernadino.

The CEIOPS chairman also said that, to supplement the Committee’s advice on the standard formula for solvency capital requirements, technical provisions and own funds, CEIOPS will also release a calibration paper in time for the consultation on QIS5.

It is likely that the European life insurance industry, particularly in the U.K. where capital increases of up to £50bn have been suggested, may be relieved to hear of this move as it will at least give it a chance to argue its case for a less stringent regime on a more empirical and constructive basis.

And, in its main comments and revisions to Consultation Paper 73 on the calibration of the MCR, CEIOPS said that it had watered down its previous proposals.

“Stakeholders expressed concern about the increased MCR factors, which followed from the increases in the calibration of the SCR standard formula in CEIOPS’ Consultation Papers. Stakeholders requested that the final calibration of the MCR is decided only after QIS5, in order to properly reflect the final calibration of the SCR and the results of QIS5. CEIOPS agrees with this as a matter of fact,” stated the Committee.

“In the revised advice, the MCR factors have been amended to reflect CEIOPS’ final advice on the SCR standard formula. The revised factors have generally been lowered relative to the Consultation Paper,” continued CEIOPS.

The latest batch of papers from CEIOPS by no means represents a total climb-down from its toughened position taken towards the end of last year following its re-assessment of the impact of the credit crisis on the sector.

But, European insurers and their customers will surely take heart from what appeared to be a more positive set of papers and in particular the stress placed upon the need to work closely with, not against or in isolation from, the industry as the Solvency II project marches towards final decision time.