Guy Carp Publishes Solvency II Internal Capital Risk Models

September 5, 2007

The implementation of the European Union’s Solvency II regulations for the insurance industry may still be six years away, but industry professionals are gearing up for the change from a strictly capital-based system to an increasingly risk-based one.

The latest publication from Guy Carpenter & Company, Marsh & McLennan’s global risk and reinsurance specialist, is titled “Internal Models — A Winning Solution for Solvency II.” It “examines the implementation of internal capital models in companies’ enterprise risk management (ERM),” as a preferred method of complying with the new regulations.

“For most small companies, using a formulaic standard model in order to comply with Solvency II’s solvency capital requirement will likely be adequate,” explained Senior VP Frank Achtert. “For larger organizations, however, developing an internal capital model as part of a broader ERM strategy offers a number of distinct advantages, in addition to regulatory compliance.

“These advantages include a better evaluation of a company’s risk profile in light of its risk appetite, the implementation of an accurate capital management approach, better measurements of returns on risk-adjusted capital for individual business segments, a more complete understanding of the relative contribution of the major categories to a company’s overall risk profile and the ability to provide quantitative input into an M&A process. In this sense, integrating an internal capital model can turn a regulatory burden into a competitive advantage.”

The report adds more impetus to undertake early planning for the changeover. Most large insurers in Europe have already begun to adopt the necessary accounting methods, and have begun to put in place the software necessary to change the way they assess their own internal risks. These actions not only give them an advance on competitors, but also bring them into line with the changing ways the rating agencies are assessing capital adequacy.

Guy Carpenter’s bulletin notes that the “EU’s proposal for a thorough revision of its insurance law provides a two-tiered approach for determination of regulatory capital adequacy. The first tier, or minimum capital requirement (MCR), is the threshold below which an insurer will not be able to write business. The second, the solvency capital requirement (SCR), is the threshold below which an insurer will likely need to discuss remedies with regulators. To calculate the SCR, companies will have the choice of a standard model, an internal capital model or a combination of both.”

A copy of the full report is available for download at: www.guycarp.com. Printed copies can be obtained by contacting Guy Carpenter at: marketing@guycarp.com.

Source: Guy Carpenter

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