Insurers plan to implement Solvency II on the cheap

Most large European insurers are not
planning on splurging vast sums on implementing the European
Union’s Solvency II regulatory requirements governing capital
adequacy for the insurance industry, reveals a study by management
consulting and technology services company Accenture. However,
cautions Accenture, keeping costs low may prove to be
counterproductive.

Accenture found that during the period before Solvency II comes
into force in 2012, one-quarter of insurers surveyed expect to
spend more than €25 million ($37 million) on attaining compliance,
one-third between €5 million and €25 million and the remainder,
about 40 percent, less than €5 million.

Of significance, insurers expect to spend far less to comply with
Solvency II than banks expected to spend to comply with the Basel
II revised international capital framework requirements, noted Eva
Dewor, a senior executive in Accenture’s insurance practice. In a
survey of banks conducted by Accenture in 2005, 56 percent said
they expected to spend in excess of €25 million between 2005 and
2007 on Basel II compliance.

Achieving Solvency II compliance with the lowest cost possible
might be an acceptable strategy for some insurers, said Dewor.
However, she cautioned: “They should be aware that a
compliance-only approach, without the necessary investment in risk
management for certain core business processes, won’t enable them
to reap the benefits they expect or to anticipate crisis
situations.”

But despite generally modest budgets for implementation, European
insurers believe Solvency II will give them a competitive edge,
said Dewor. Accenture’s survey found that 94 percent of respondents
believe their investment in Solvency II compliance will increase
stakeholders’ confidence in risk control and management, 88 percent
expect it to increase stakeholders’ confidence in their capital
reserves and 85 percent said they expect it to provide enhanced
capital management. Nearly all (98 percent) of respondents said
Solvency II would have an overall positive impact on the insurance
industry.

However, Dewor stressed that Accenture’s findings indicate that
many companies still do not have even the necessary risk-management
basics in place. Notably, while the vast majority (93 percent) of
respondents said they believe that Solvency II will increase the
importance of risk-management capabilities, a significant number
said that their organisation needs to enhance their risk
infrastructure in order to better identify, assess, quantify and
monitor risks. Specifically, 86 percent of respondents said that
their organisation’s risk culture and quantitative risk management
needed to be improved, and 79 percent said that their risk control
capability and embedded risk management needed to be
improved.

Dewor added that to take advantage of Solvency II, insurers must
also better integrate risk management and governance into their
decision-making processes while improving their portfolio
optimisation and pricing capabilities.

Indeed, Accenture’s survey revealed that less than 20 percent of
respondents consider themselves well prepared for the start of
Solvency II. Core capabilities where respondents identified the
most significant need for improvement were risk-based product
pricing (89 percent of respondents), the integration of risk
management and governance into decision-making processes (80
percent), underwriting portfolio management (71 percent), asset and
liability management (70 percent), and asset portfolio management
capabilities (63 percent).

Challenges posed by Solvency II are daunting enough for large
insurers but for small insurers they may be insurmountable and,
said Accenture, “a wave of merger and acquisition activity is
expected”. Notably, 82 percent of insurers surveyed stated that
small insurers will be the likely losers while large companies will
be among the winners.

Accenture’s survey covered 44 large life and general insurers in
nine Western European countries.