April 14th, 2011

Succeeding Under Solvency II, Disclosure (Pillar Three), How Guy Carpenter Can Help

Posted at 1:00 AM ET

Pillar III: Disclosure

Two levels of disclosure are required under Pillar III of Solvency II: regulatory and public. The details discussed above about Pillar II reflect the corporate governance disclosures necessary under the directive. Pillar I requirements address the disclosure of risk and capital levels to regulators. Additionally, (re)insurers affected by Solvency II will have to disclose risk and capital information - as well as modeling details - to the public.

Among the challenges associated with both the calculation and disclosure are the rules around accounting. Carriers will need to disclose the differences in accounting methods used for Solvency II and other financial reporting until the directive and IFRS are more closely aligned.

The use of mark-to-market practices may be particularly problematic for carriers complying with Pillar III. The view of mark-to-market under Solvency II is at odds with the majority of accounting practices in Europe, creating a reporting gap that will likely lead to additional disclosure and reporting effort. However, the current accounting regulations for insurance contracts under IFRS (referred to as “IFRS Phase 4″) use a similar “fair value” approach to that in Solvency II. The challenge is the differences in some accounting results - e.g., regarding the measurement of reserves and recognition of profit. Currently, there is a lack of clarity as to how (re)insurers and regulators will deal with these inconsistencies.

How Guy Carpenter Can Help

Directly or indirectly, Solvency II will change the insurance industry worldwide - the impact will not be limited to carriers located in or covering risks in Europe. Unprepared for the regime, some companies may be challenged (and possibly even fail). However, (re)insurers that have prepared sufficiently may actually become more successful under Solvency II.

Guy Carpenter is the reinsurance broking authority on Solvency II and is ready to assist its clients in getting ready for the challenges and opportunities associated with Solvency II. Since every carrier’s situation is different, we offer a number of tailor-made solutions - each designed to be achievable and deliver measurable value - from compliance cost management through the creation of shareholder value.

Under Solvency II, a well-considered competitive compliance strategy can enable companies to operate relatively more effectively and profitably both in Europe and globally. Pillars II and III, in particular, present opportunities for risk carriers to obtain competitive advantages pursuant to better governance, transparency and disclosure. For those companies with an effective strategy, Solvency II compliance can transform carriers’ operations to make the company more competitive.

Our solutions are focused on the targeted validation of critical components and assumptions in our clients’ capital models using our broad industry experience, technical capabilities, proprietary software and intellectual capital. We provide clients with the crucial “second pair of eyes” and sensitivity testing that is mandated by the Solvency II regulatory requirements.

Among the services we offer our clients are:

Capital Model Implementation (Partial or Full) - MetaRisk®

MetaRisk is Guy Carpenter’s proprietary stochastic reinsurance and capital modeling platform. It is a uniquely powerful, flexible and transparent solution that enables us to model clients’ entire portfolios rapidly, accurately and reliably.

MetaRisk’s capabilities span all risk modules of the SCR. Thus, it can serve as a full or partial internal model for Solvency II.

MetaRisk provides a highly realistic way of modeling reserve risk, which reflects (re)insurers’ own reserving practices. This is particularly useful for Solvency II compliance, given the new regulations’ acute focus on loss reserves.

By building a parallel version of a client’s underwriting risk model (gross losses, ceded premium and ceded losses) in MetaRisk, we can undertake comprehensive validation and sensitivity testing as required under Solvency II. MetaRisk employs sophisticated algorithms that most closely replicate the treatment of secondary uncertainty by RMS so that the platform’s estimation of extreme losses (e.g., 1-in-200-year events) is nearly exactly the same as that produced by the actual vendor model.

MetaRisk’s simulation speed empowers carriers to compare any desired metric for multiple alternative selections for loss frequency and severity. Consequently, they can sensitivity-test their original assumptions around loss ratio, premium growth, underwriting cycle and inflation.

MetaRisk is able to simulate clients’ underwriting risk (losses and reinsurance) with a sufficient number of simulations within a relatively short timeframe. This allows an assessment of the impact of potential simulation error within the main capital model on key extreme scenarios, such as the 1-in-200-year underwriting result.

Alternative Catastrophe Modeling

Guy Carpenter’s Model Development Team, established in 2004, has developed a number of industry-leading proprietary catastrophe models for peril-regions for which no other models exist by the established model vendors (RMS, AIR, EQE), or where market-wide modeling technology is still not as advanced as the Guy Carpenter proprietary alternatives.

Man-made Catastrophe modeling

In addition to the modeling of natural perils, GC Analytics has acquired an expertise in the modeling of man-made catastrophes. This is accomplished through both the use of commercial modeling platforms and the development of proprietary tools. The wide range of services offered covers the assessment of man-made events for conflagration and terror - including the uncertainty associated with the geocoding of risks - casualty events, pandemic, events that may hit a life portfolio and for marine cargo accumulations.

Actuarial Expertise

GC Analytics’ expertise and industry leading modeling proprietary software can help carriers:

  • Parameterize their portfolios
  • Supplement their existing data with more from the industry
  • Enhance model performance through additional technical knowledge and capabilities

GC Analytics teams can propose a number of tailor-made solutions to assist (re)insurers with their implementation of Solvency II frameworks. These solutions have been kept targeted and specific, as opposed to our offering them as a “general Solvency II advisory” service. This ensures that the solutions are achievable and deliver measurable value.

Experience and Exposure-Based Parameterization of Risk Losses

Guy Carpenter can use MetaRisk® Fit, our advanced proprietary curve-fitting software, to fit clients’ historical loss histories to up to 33 different distributions, in order to serve as a second opinion to their own fittings. Furthermore, all the MetaRisk® Fit data includes calculation of the parameter uncertainty associated with fitting to limited sample sizes, providing an element of sensitivity testing.

A Range of Customized Advisory Services

Guy Carpenter offers deep advisory expertise in areas that many clients will find useful in their Solvency II preparations, including reserve risk modeling, enterprise risk management and reinsurance counterparty risk exposure.

Click here to read additional materials on Solvency II on GC Capital Ideas >>

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