New IFRS Standards, Solvency II Pose a ‘Double Hurdle’ Says Willis Re

October 27, 2010

Two reports from Willis Re analyze the impact the insurance industry faces from the “double hurdles” of Solvency II and the new International Financial Reporting Standard (IFRS) due in 2013.” They explore the “current state of play of these major developments in insurance regulation and reporting.”

The two papers – “QIS5: Solvency II Nears the Finishing Line” and the “International Financial Reporting Standard” were released by Willis Group Holdings reinsurance arm to coincide with this week’s gathering of European reinsurance professionals in Baden Baden and the annual meeting of the Property Casualty Insurers Association of America in Colorado.

Willis Re explained that they “provide up-to-date news and insights that demystify Solvency II and IFRS to help insurance organizations find a path through the forest of new regulations and develop appropriate strategies to win and thrive in this unchartered business territory.”

David Simmons, Managing Director, Analytics and Head of International Enterprise Risk Management for Willis Re commented: “The differences between Solvency II and IFRS versus existing standards are startling and the implications huge, particularly if insurers are moving from a local standard with very different rules on reserving.

“Solvency II and IFRS will have profound implications for all insurance professionals in Europe, but the repercussions will be felt worldwide with the new IFRS being adopted by most major economies in 2013 and the rise of Solvency II-like regulatory regimes worldwide.”

The new IFRS is being rolled out at the same time as Solvency II, and Willis Re’s reports detail how the new regimes will require additional compliance efforts, new skill sets, updated standards of data capture and additional costs for insurance companies. “Many insurers do not have the right staff and systems to deal with these developments in combination, and there is little time to prepare,” Simmons added.

Key findings in the reports include the following:
— Solvency II will mean that regulatory capital will be an issue for the first time for many insurers. In fact, 11 percent of insurers failed to meet the Solvency Capital Requirement under the fourth Quantitative Impact Study (QIS4). QIS5 is tougher and it is expected that the failure rate will be much higher, especially for smaller, regional insurers who are unable to benefit from diversification credit. Reinsurance, an efficient form of surrogate capital, will be vital to many companies’ ability to meet the new standards.

— There will be an upswing in interest in internal capital modeling, as insurers seek to replace elements of the standard solvency calculation that are inappropriate for their business. Smaller insurers may not have the resources to develop internal models, and many regulators may struggle to meet the demand for internal model approval.

— The new IFRS will lead to increased volatility for insurance accounts. Some territories also will see the abolition of equalization and catastrophe reserves.

James Vickers, Chairman of Willis Re International and Specialty explained that the “additional workload on companies from Solvency II and IFRS will be considerable, but not without benefit. Willis Re has built its business based upon this new landscape, and we will deliver to our clients the expertise, tools and assistance that they will need to succeed and grow in this more complex new environment.”

Source: Willis Re

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