The European Insurance and Occupational Pensions Authority (EIOPA) has announced the results of the fifth Quantitative Impact Study (QIS5), in order to assess the practicability, implications and impact of specified approaches to (re)insurers valuation of assets and liabilities as well as capital setting under Solvency II, the new insurance directive that becomes effective on 1 January 2013.
Under Solvency II capital requirements will be determined on the basis of the risk profile of insurance companies and the way companies manage such risks.
QIS5 was the most comprehensive exercise to assess the impact of some key aspects and was executed upon request of the European Commission.
Participation of insurers in the exercise increased considerably, compared to the fourth Quantitative Impact Study that was conducted in 2008. Almost 70% of all insurance and reinsurance companies under the scope of the Solvency II directive participated in QIS5, up from 33%, who participated in QIS4. Additionally, 167 insurance and reinsurance groups participated, up from 111 under QIS4.
However, experts say that it does not truly reflect operational risks.
The QIS5 results are an important part of the design of Solvency II rules, says Peter Vipond, Director of Financial Regulation & Taxation, ABI. However, we shouldnt attribute too much weight to the results; it is a test of the system not of companies. The regulators must now work quickly to make amendments to the Level 2 implementing measures in light of the results. We are fast approaching the concluding stages of these and progress on these points must not be protracted.
In cooperation with the European national supervisory authorities, EIOPA evaluated the data that was provided by European insurance companies and groups between July and November 2010. The results will ultimately feed in to the European Commissions further development of the new regulations and help to shape the final Solvency II landscape.
Solvency II introduces two levels of capital requirements: the minimum and the Solvency Capital Requirement. If a company misses the Minimum Capital Requirement (MCR), ultimate supervisory action will be triggered. If the SCR threshold is missed the respective supervisory authority will determine supervisory responses linked to the concrete situation of the firm.
Overall, QIS5 showed that the financial position of the European insurance and reinsurance sector assessed against the Solvency Capital Requirements (SCR) of the Solvency II directive remains sound. Currently, insurance companies who participated in QIS5 hold 395 billion of excess capital to meet their solvency capital requirements (SCR) and excess capital of 676 billion to meet their minimum capital requirement
(MCR) as defined in the Solvency II directive. This confirms the strong position of the European insurance sector since the capital surplus was reached despite a difficult market situation, says the EIOPA.
These challenging market conditions, mainly due to decreasing asset values as a result of the impact of the financial crisis, resulted in a lower surplus under the still applicable Solvency I rules, says the group.
For insurance and reinsurance groups, QIS5 resulted into a reduction of their capital surplus. Compared to the calculation under Solvency I standards, insurance groups have 86 billion less surplus capital available, which is a reduction of 44%. However, the QIS5 exercise demonstrated that this effect would be largely absorbed if insurance groups apply internal models and transitional measures to calculate the capital requirements under Solvency II. This would limit the reduction of the surplus to 3 billion, which represents roughly 1%.
QIS5 also examined calibrations within Solvency II. QIS 5 shows that, while the calibrations in the system are in general accepted as appropriate, EIOPA is already performing additional work in particular in the areas of Non Life and CAT modules to improve these calibrations.
There remain a number of outstanding issues in Solvency II, particularly the treatment of some long term products which carry guarantees for consumers, says 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.
EIOPA stresses that the different requirements and design of Solvency I compared to Solvency II have to be considered, and so does the diversity of the European insurance sector. The difference is characterised by an increase in capital requirements, a decrease in technical provisions and a relative increase in the amount of own funds that are allowed to be used to meet the capital requirements.