September 5th, 2009

2009 YTD: Top Solvency II Stories

Posted at 1:00 PM ET

With Rendez-Vous 2009 coming to Monte Carlo next week, review the top stories of the year on Solvency II below.

Status of Solvency II for Life Carriers: Participation in Quantitative Impact Study 4 (QIS4) exceeded European Commission expectations for small, medium, and large companies. The results, published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) in November, suggest that 98.8 percent of the carriers participating will meet the Minimum Capital Requirement (MCR) and 89 percent satisfied the Solvency Capital Requirement (SCR), though the ongoing financial catastrophe could cause some changes to this result. Quantitative Impact Study 5 (QIS5), originally planned for early this year, has been deferred because of the potential impact of the financial crisis.

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(April 21, 2009)

Cat Risk in a Solvency II Environment: Many approaches exist for use in assessing catastrophe risks. Under Quantitative Impact Study 4 (QIS4), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) provided a list of those that can be used for Solvency II compliance and, in the interim, managing risk and capital effectively. The full stochastic modeling of catastrophe risk using an internal model, such as Guy Carpenter’s G-Cat® tools and MetaRisk®, provides the most information.

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(April 17, 2009)

Where Are We on Solvency II?: Solvency II will require insurers and reinsurers domiciled in the European Economic Area (EEA) to assess their regulatory capital requirements within a forward-looking risk sensitive framework. Solvency II has reached a decisive point in its development, as the focus moves to how the directive will be implemented in practice and how it will shape the competitive landscape of the insurance industry. From a quantitative perspective, the results of the Quantitative Impact Study 4 (QIS 4) were published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) in November 2008. From a political perspective, the group support concept was abandoned to avoid further jeopardizing the targeted implementation by 2012.

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(April 6, 2009)

Solvency II — New Developments on Counterparty Credit Risk: In its series of Consultation Papers on Level 2 Implementing Measures for Solvency II, CEIOPS drafted a new proposal for the calculation of counterparty credit risk. While Consultation Paper 28 (March 2009) gives a general overview of the proposal, the more recent Consultation Paper 51 (July 2009) provides insight into the details of the model.

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(August 13, 2009)

What Does Solvency II Mean for Insurance Groups?: When Solvency II becomes effective in 2012, group support — which would have allowed capital held at the group level to cover the requirements of any company in the group — will be not permitted. This prohibition will require group entities to hold capital according to the Solvency Capital Requirements (SCR) in each individual entity. The application of group-level diversification benefits to individual entities will not be allowed. This last-minute change to the original framework directive may cause some groups to change their structures. At a minimum, they are likely to rethink how much risk capital will be carried at the group level versus the operating entity level given that the risk capital needed in the group will increase without recognition of group support.

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(August 17, 2009)

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