The shoe doesn’t fall until 2010, but already, according to a survey by the Ernst & Young Global Insurance Centre, 80 percent of “major European insurance companies have already begun Solvency II (SII) criteria implementation and two-thirds see these actions as a way to improve risk management across the business,” said an e-mail from the accounting and consulting firm.
E&Y pointed out that “a good part of the industry is owned by European companies creating a direct impact, but the reality is, European owned or not, there will be a domino effect as SII efforts in Europe raise the bar for the whole industry.”
“Solvency II is not a far off reality and company infrastructure changes will not happen in a vacuum,” stated Lex van Overmeire of Ernst & Young’s Solvency II Taskforce. “With European insurers developing internal models, readying information systems, and meeting complex data requirements, this new way of conducting business will have global repercussions.”
SII is designed to replace the Solvency I rules currently in force in order to offer greater protection to policyholders. Solvency I’s primary focus is on capitalization, and this has proven ineffective in regulatory terms. SII is designed to correct that by concentrating on the level of risk a company may carry, and aligning capital requirements with that risk. In order to achieve that goal the SII rules place a far greater emphasis on risk management capabilities.
The Ernst & Young report indicates that this has turned out to be a positive step, “as two-thirds (61 per cent) see it as a means to improve all aspects of their risk management across the whole business.” However, the task is daunting. E&Y said its survey queried “senior managers with responsibility for Solvency II in 54 of Europe’s largest insurers, spread across 16 countries, with an average asset size of €110 billion [$140 billion].”
Van Overmeire noted: “Solvency II pressure on insurers is mounting and the timetable is becoming critical. While the industry is embracing the benefits, there are practical issues around readiness which must be overcome. Insurers are facing the challenge of developing internal models, the adequacy of information systems, the complexity of data requirements and the skills levels within their organizations.”
His colleague on the E&Y TaskForce, Niek de Jager, added: “Solvency II is driving the convergence of Enterprise-wide Risk Management (ERM) and the economic capital concept in global insurers. This is a great opportunity for them to optimize costs and drive real business value. However, in order to reap the benefits, companies need flexible information systems and data models. At present many existing information systems are not sufficient to support enterprise risk management, and temporary workarounds will only be more costly in the long run.”
2010 isn’t all that far away, and as EU companies continue to improve “the way they look at pricing and profit emergence, U.S. companies will need to improve risk management in order to keep up with the market,” according to E&Y. “Smart U.S. companies will not stick their head in the sand by thinking Solvency II is a continent away,” stated Doug French, Global Director of E&Y’s Insurance and Actuarial Advisory Service practice. “It doesn’t matter why, if your competitors are making changes that will improve their business, you need to get on board or risk falling behind.”
E&Y’s survey, as detailed in a press bulletin, also noted the following “key areas” where further work on SII is needed:
— Only one in five (20 per cent) insurers believes their current capital models will comply with Solvency II; nearly half of insurers believe their internal models will need significant enhancement. Without qualifying models Solvency II using standard formulas is the only option.
— Although half (53 per cent) of insurers believe necessary changes to their information systems will not be a significant issue, the larger insurers in particular anticipate major changes being necessary to both information models and corresponding systems before they can produce all the data required by Solvency II. Without the correct systems the required information can only be delivered with significant additional burden.
— Two thirds (64 per cent) of insurers highlight a need to upgrade the skills of actuaries and risk managers to deal with the challenges of Solvency II; of these, 15 percent recognize their current skill base falls short of the level required and many anticipate difficulties in hiring competent people.
— The importance of operational risk assessment seems to be receiving less focus at this stage and there is less modeling or measuring of these risks than other risk categories. This is due to an industry-wide lack of the historical data needed to enable effective risk management.
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