Heightened Regulation Forcing Insurers to Focus on Modeling Risks: Conning

September 19, 2012

The growing level of activity among regulatory bodies and quasi-regulatory agencies focused on strengthening insurance solvency protection systems, particularly regarding increased risk capital and enhanced risk management, will force insurers to focus more attention on modeling their risks, according to a new study by Conning Research & Consulting.

“The collective effect of the forthcoming regulatory initiatives such as Solvency II, NAIC’s Solvency Modernization, ORSA, and others is an intensified focus on the key levers of solvency protection: increased risk capital and enhanced risk management,” said Alan Dobbins, analyst at Conning. “While there are differences in approach and emphasis across the various initiatives, one common theme has emerged: the need for companies to have a clearer understanding of their risks, and for transparent structures and processes to be in place to manage risk.”

The Conning Research study, “Insurance Solvency Regulation: The Race for a Workable Risk-Based Solution” reviews Solvency II and the NAIC Modernization Initiative, as well as legislative and rating agency influences on regulatory capital requirements.

“To respond to these new regulatory structures and compete effectively under these new regimes, insurers will need to build sophisticated internal models to analyze their risks and, more importantly, to be able to present that view to regulators,” said Mary Pat Campbell, analyst at Conning. “The proposals focus on approaches that encourage firms to engage in a substantive assessment and discussion of risks rather than simply targeting capitalization levels. Larger firms will have a clear advantage as they can support the modeling resources needed to respond, and will likely gain a capital advantage as a result.”

“In addition to the threats that affect individual insurers disproportionately, there are also unintended, systemic consequences to the entire insurance system that new regulations may bring,” said Stephan Christiansen, director of research at Conning. “Insurance regulators are certainly aware of these risks, and will likely be focused on them as they implement the forthcoming regulations.”

Conning Research & Consulting is a division of Conning, a provider of asset management and insurance industry research and consulting services to insurers.

Source: Conning Research & Consulting

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