June 22nd, 2011

Succeeding Under Solvency II: Entire White Paper Series

Posted at 1:00 AM ET

Guy Carpenter recently published a series of three white papers on Solvency II covering key issues of relevance to (re)insurers. We bring the entire series together here.

Succeeding Under Solvency II: Pillar One, Capital Requirements; Part I: Despite its nominally European focus, Solvency II presents a wide range of considerations - and opportunities - to insurance entities worldwide. This new regulatory framework will enact a fundamental change in the way the European insurance industry looks at risk and risk management practices, as it will force the convergence of all aspects of risk quantification with those of business decision making. All businesses that have operations, subsidiaries or affiliates in Europe, write coverage in Europe or do business with insurers in Europe should be preparing now for these wide-ranging changes.

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Succeeding Under Solvency II: Pillar One, Capital Requirements; Part II: Pillar One’s Impact on Insurers: The first pillar of Solvency II is the quantitative component of the new regulations. It deals with the capital requirements of insurers wishing to provide coverage in the EC markets.

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Succeeding Under Solvency II: Pillar One, Capital Requirements; Part III - Conclusion: It is clear that Solvency II presents a host of challenges to (re)insurers. With a disciplined and thoughtful approach, many companies will see opportunities to lessen the impact - or even to improve their competitive stance in the industry. Below we explore in detail some of the key considerations, challenges and opportunities associated with Solvency II.

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Succeeding Under Solvency II, Corporate Governance (Pillar Two) and Disclosure (Pillar Three): Preparation: Preparing for “Pillar V”: Implementation of the Solvency II regime is approaching rapidly. The directive is expected to take effect in January 2013 and will mostly affect, but not be limited to, (re)insurers operating in or covering risks in Europe.

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Succeeding Under Solvency II, Corporate Governance (Pillar Two): To support Solvency II compliance, (re)insurers need to implement rigorous corporate governance programs that address all areas of the company, from the tone and activities of company leadership through granular risk and capital management activities. The corporate governance framework should define a clear and robust organizational structure - including an adequate operational structure, the clear allocation of tasks and responsibilities, organizational transparency and efficient information systems across all business activities. The structure should delineate a clear separation between the risk management function and the audit function. There should be a clearly apparent independence of the two functions from each other. Management’s responsibilities must be evident.

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

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Succeeding Under Solvency II, Reinsurance and Counterparty Risk: Impact of Solvency II on the Reinsurance Market: In this briefing, the third in the series, we concentrate on special considerations for reinsurance and counterparty risk.

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Succeeding Under Solvency II, Reinsurance and Counterparty Risk: Solvency II Counterparty Default Risk Considerations: Counterparty default risk is one of the core components of the Solvency Capital Requirement (SCR). This module has undergone substantial change over the several quantitative impact studies (QIS) as the supervisors attempted to find an appropriate measure of the risk. In the QIS 5 final report, EIOPA noted that this module received the most criticism for the “overly complex approach” relative to the materiality of counterparty default risk within the overall risk-based capital requirement. We expect to see additional changes that will simplify the calculation of risk.

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Succeeding Under Solvency II, Reinsurance and Counterparty Risk: How Guy Carpenter Can Help: Solvency II will profoundly impact the reinsurance market, though perhaps not exactly in the ways reinsurers or regulators have anticipated. This impact will not be limited to European reinsurance markets, but will be felt globally. Advances in disclosure and overall market strength will come with costs, including a more volatile pricing environment.

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