Solvency II’s final dry-run test, the fifth
quantitative impact study, has been hailed as a success by industry
bodies and regulators. However, with Solvency II’s implementation
date drawing closer, many concerns still surround certain aspects
of the regulatory regime that pertain to life insurance
business.
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All
is well with the insurance industry in Europe, industry body the
Comité Européen des Assurances (CEA) has declared following release
of the results of the fifth and final Solvency II quantitative
impact study (QIS5). The study was conducted between August and
November 2010 by the European Insurance and Occupational Pensions
Authority (EIOPA) in preparation for implementation of the new
regulatory regime by all European Union member states at the start
of 2013.
In a
statement the CEA said: “The QIS 5 results, which are released
today by the European Insurance and Occupational Pensions
Authority, highlight the strong financial position of European
insurers despite a difficult market environment. The QIS5 results
show that capital levels tested against the solvency capital
requirements (SCR) under Solvency II remain
sound.”
According to EIOPA, almost 70% of insurance and
reinsurance companies under the scope of the Solvency II directive
participated in QIS5, up from the 33% that participated in QIS4.
The EIPOA was formally called the Committee of European Insurance
and Occupational Pensions Supervisors. Of insurers participating in
QIS5, 15% failed to cover the SCR under Solvency
II.
Rating
agency Moody’s Investor Services noted that while specific
companies are not cited in the results, those that failed to
participate at all and those that produced solvency coverage ratios
below 100% are smaller entities with little business
diversification.
“The
results confirm our view that few of our rated insurers need to
raise capital because of Solvency II implications,” stated
Moody’s.
Similar
conclusion
EIPOA
drew a conclusion from QIS5 similar to that of the
CEA.
“Overall, QIS5 showed that the financial position
of the European insurance and reinsurance sector assessed against
the solvency capital requirements of the Solvency II directive
remains sound.”
EIOPA
added that currently, insurance companies who participated in QIS5
hold €395bn ($550bn) of excess capital to meet their SCR and excess
capital of €676bn to meet their minimum capital
requirement.
According to EIOPA, mainly because of lower asset
values, the capital surplus of insurers and reinsurers was lower
than under the still applicable Solvency I rules. Specifically,
compared to the calculation under Solvency I standards, insurance
groups have €86bn less surplus capital available, which represents
a reduction of 44%.
However, highlighting the significance of insurers
developing their own internal risk models rather than using the
standard formula, EIOPA stressed that the QIS5 exercise
demonstrated that the capital reduction effect would be absorbed if
insurance groups apply internal models to calculate Solvency II
SCR. This would have limited the reduction of the capital surplus
to about 1% or €3bn across participating insurers, noted
EIOPA.
Indeed,
Moody’s noted that insurers groups that used an internal model to
calculate their SCR showed a 6% increase in surplus capital when
moving from Solvency I to QIS5, compared to the 44% reduction in
surplus for groups using the standard formula.
“This
confirms our view that large, well diversified groups with robust
and entrenched risk-management and internal models are best placed
to transition to Solvency II,” stated the rating
agency.
CEA concerns
“Despite the insurance industry’s successful
performance in QIS5, adjustments need to be made to some measures,”
CEA president Tommy Persson said. “The [European] Commission is
correct that the issue of the sensitivity of the Solvency II
framework to market volatility must be
addressed.”
Persson
said that the insurance industry is also adamant that expected
profits in future premiums must be treated as Tier 1
capital.
“This
is a key feature of a risk-based economic regime,” stressed
Persson. “There must be no disincentive to offering regular premium
products.”
The CEA
has also expressed concerns about treatment of long-term business
and guarantees, concerns that are shared by the Association of
British Insurers (ABI).
“There
remain a number of outstanding issues in Solvency II, particularly
the treatment of some long-term products which carry guarantees for
consumers,” said ABI director of financial regulation and taxation,
Peter Vipond. “We need some practical changes to the current rules
so these can continue to be written for the benefit of consumers
and in a way which is not pro-cyclical.”
Summing
up the CEA’s view, Persson said: “A lot is at stake here. Solvency
II is an innovative and ground-breaking regulatory regime that
should enhance the position of the European insurance industry
through its combination of capital requirements complemented by
qualitative supervision. We must nevertheless be vigilant that it
does not inadvertently have adverse effects on the
market.”
Underscoring the significance of his comment, the
European Commission is currently drafting its proposals for the
implementing measures that provide the technical detail of the
Solvency II Framework Directive which was agreed on in
2009.
The
commission is expected to present the implementing measures by the
end of 2011 and its directive to be transposed into national
legislation in all European Union member states by 31 December
2012. How certain that deadline is remains to be
seen.
“The current [Solvency II] schedule
is on a knife edge in terms of what is practically achievable,”
Vipond observed.
