Willis and S&P give warnings over Solvency II QIS5 results

The credit rating agency says that they highlight the potential volatility of the regime on solvency levels once it has been implemented in 2013. In a recent report S&P said that the overall impact of QIS5 is greater than that of QIS4, the previous impact study, which confirmed its expectation that Solvency II will have a ‘significant capital impact’ on the (re)insurance industry. The agency also said that the study also confirmed its belief that the non-capital-related implementation challenges will be just as significant. "The QIS5 results were based on year-end 2009 balance sheets," said S&P credit analyst Rob Jones. "Had the exercise been performed on 2008 balance sheets, which were impaired by turmoil in the financial markets, we believe the outcome would have been more pronounced. This illustrates the potential volatility of SCR [solvency capital requirement] coverage under Solvency II," he explained.hideS&P noted that the report from the European Insurance and Occupational Pensions Authority (EIOPA) showed that average SCR coverage was 165%, compared with 310% under Solvency I. More significantly, according to the ratings agency, under QIS5, 15% of Europe's insurers failed to cover their SCR and 5% failed to cover their minimum capital requirement. S&P also pointed out that, in its opinion, QIS5 also confirms that the implementation of Solvency II will ‘test’ insurers' operational capabilities. “The framework is complex and some companies, especially smaller ones, will find some parts of the process, such as performing the calculations or maintaining data quality, very challenging,” stated S&P. In a report entitled Beware the Dog that Didn’t Bark – Is the European Insurance Industry Really Ready for Solvency II?, Willis Re found that the QIS5 study showed a smaller than expected increase in the number of companies failing to meet their Solvency Capital Requirement (SCR), the threshold below which regulators will be required to intervene. While this figure rose from 11% for 2008’s QIS4 study to 15% for QIS5, Willis Re noted that the increase was not as dramatic as expected considering the impact of the financial crisis on insurers’ balance sheets, the sharp increase in standard formula risk factors used in QIS5 and the doubling of the number of small insurers taking part in the exercise. Small insurers were expected to fare comparatively badly due to their limited diversification. On the whole, Willis Re said that the QIS5 study, conducted by the European Insurance and Occupational Pensions Authority (EIOPA) between August and November 2010, points to the (re)insurance industry being comfortably well-capitalised and in relatively good shape for the implementation of Solvency II in 2013. However there remain some concerns, the broker continued. Many QIS5 participants felt that a number of SCR sub-modules were disproportionately complex, which led to widespread use of simplifications, the broker explained. A notable example of this was the counterparty default risk sub-module. The catastrophe risk sub-module was the most criticised. Respondents’ feedback was, to some extent, contradictory as they complained both about the complexity of data requirements and the limited sensitivity to actual risk exposure said Willis Re. Willis Re believes that a fundamental review of CAT risk treatment is needed—extending the concept of Undertaking Specific Parameters (USPs) to the catastrophe calculations. The results also indicate that internal models did not provide materially different outcomes from the standard formula, continued Willis Re. “Quite surprisingly, a significant number of insurers that have already applied for regulatory approval did not use their models in QIS5, for example in the UK.” "It is disappointing that EIOPA does not seem to accept that the introduction of a robust USP approach for catastrophe risk could significantly improve the appropriateness of the standard formula whilst giving regulators the comfort that insurers are not able to cherry-pick the lowest catastrophe model results," said Ian Cook, managing director, analytics and chief actuary for Willis Re International & Specialty. Whilst the European Commission has raised the possibility of a gradual implementation of Solvency II requirements over a period of up to 10 years, giving companies and regulators some breathing space, Willis Re believes that the relatively benign QIS5 results may remove the pressure for a long transition period.

Willis and S&P give warnings over Solvency II QIS5 results

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Related Articles