Solvency II on the Move ... to Somewhere (updated)
By GRAHAM BUCK, who covers European risk management issues
As an old Art Garfunkel tune puts it "We are going, heaven knows where we are going ... We'll know we're there."
LONDON---The lines could sum up the European Union's fast-approaching Solvency II regime, now less than two years away from introduction. The tough new capital adequacy rules represent a whole new ballgame for Europe's banks and insurers, but nobody is yet quite sure of the rules.
As the latest outlook from Towers Watson observed, companies will (or should) have started preparing for Solvency II some time ago, yet the final detail won't be cast much before the Jan. 1, 2013 deadline. There is, however, agreement that nonlife insurers and reinsurers both in Europe and Bermuda will respond to higher capital charges by pushing up rates.
Meanwhile, Europe's major insurers are lobbying for greater leeway. Munich Re, for example, insists that a five-year transition period is needed to phase in the new rules. Indeed, some claim that such is their complexity, national supervisors will themselves struggle to put them in place by the end of 2012.
Last week, the sector won some concessions as the EU indicated that it might provide "transitional measures," including pushing back dates for some of the adjustments that companies need to make if they threaten market disruption.
Lloyd's of London continues to press for a reduction in the amount of capital that insurers must hold under the new regime against their exposure to major disasters. Like other insurers, it wants a more sophisticated internal model for assessing the amount of capital deemed necessary, which should be lower than the figure required by the standard model.
"It is glaringly obvious the standard formula does not work for global players like Lloyd's," its chief executive, Richard Ward, said recently. "It is too onerously calibrated, particularly in its assumptions around catastrophe risk."
Lloyd's finance director, Luke Savage, added that the corporation's annual expenditure on Solvency II has been 70 million pounds ($112 million) since 2009. The estimated final bill will be upward of 250 million pounds, or 40 percent of its total profit for the first half of 2010; a figure he said is in line with estimates from other major European insurers (his chairman Lord Levene has already upped the estimate to 300 million pounds, per Reuters).
RISK MANAGERS, ACTUARIES
The Towers Watson report dubbed 2011 "a key year for Solvency II," and identified five trends: competition for scarce resources, capital management, internal models, risk management and increased public disclosure.
"Put together these five trends, and what this means for risk professionals is that demand for our skills exceeds supply in the insurance sector and we will need to draw in experienced enterprise risk management professionals from corporates and banks," said Alex Hindson, chairman of the U.K.'s Institute of Risk Management (IRM).
"There is also a huge focus on getting the 'right' risk governance in place in terms of creating and implementing a practical but robust risk management framework across organizations. Risk assessment, management and reporting need to be 'embedded' into the culture of the organization. This is the core territory of ERM professionals and a tremendous opportunity to raise our profile and deliver value for organizations," he added.
Solvency II also impacts claims, particularly reserving, said Daniel Saville, legal director, reinsurance and corporate insurance, at law firm Reynolds Porter Chamberlain.
"Insurers will be bound to produce a 'best estimate' for claims reserves, which must be calculated on the basis of the most likely outcome," he said. "The best estimate may not be calculated as the 'realistic worst case' or include an uplift for cautious conservatism. So many insurers will have to review reserving policies and potentially adjust existing reserves.
"In addition, Solvency II requires assets and liabilities to be provided for on a cash flow basis. Claim handlers will be required to estimate when a claim is likely to be settled or otherwise become payable. Where a recovery is expected from a third party, separate entries will have to be made according to the likely date of payment of the gross claim, followed by receipt of the recovery amount," he explained
Not surprisingly, actuaries and professionals with Solvency II expertise are being assiduously courted by insurers, and salary rates are soaring. According to Paul Clark, global Solvency II leader for PricewaterhouseCoopers: "Many could find themselves paying over the odds for people with the right skills if they don't clarify their resource skills sooner rather than later."
January 25, 2011
Copyright 2011© LRP Publications