June 26th, 2012

Top Solvency II Stories in GC Capital Ideas

Posted at 1:00 AM ET

Here we highlight GC Capital Ideas’ recent top stories covering the evolving Solvency II capital requirements regime.

Oliver Wyman: Strategic Impact of Solvency II:  Guy Carpenter sister company, Oliver Wyman, has published a new report on Solvency II. The road to implementing Solvency II has been longer and more circuitous than expected. In Oliver Wyman’s joint report with Morgan Stanley, Solvency II: A Long and Winding Road, they provide insights on implementation progress thus far.

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Industry Good Practice for Catastrophe Modeling & Solvency II: Part III, How GC Analytics® Can Help: Knowing the importance to our clients of understanding and applying catastrophe models in a robust way, GC Analytics has devised a unique service proposition: model suitability analysis (MSA). With this service, our clients gain a superior informed position when deciding how to reflect the catastrophe risk of a portfolio within their risk management frameworks.

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Industry Good Practice for Catastrophe Modeling & Solvency II: Part II, Operational Principles and Technical Considerations: The message that data quality is vital to catastrophe modeling comes through loud and clear in the opening of Section 2. The old adage “garbage in, garbage out” is much abused, but in catastrophe modeling it has certainly earned a place. Companies should be cognizant of the impact that data manipulation has on the results produced by models. As a result, sensitivity testing should become much more prominent. Data should be tested for accuracy, completeness and appropriateness, along with a wide range of assessments employed in terms of spatial, temporal and thematic qualities. Missing and incorrect data should be accounted for through appropriate “grossing up” techniques, which should be documented in a formal data policy.

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Industry Good Practice for Catastrophe Modeling & Solvency II: Part I, Background and General Principles: The UK insurance industry, supported by the Association of British Insurers (ABI), has developed a report “Industry Good Practice for Catastrophe Modeling & Solvency II” to guide companies’ use of catastrophe modeling under Solvency II.

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Solvency II: 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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Solvency II Pillar Three: Disclosure:  Dubbed “the forgotten pillar,” as it tends to get attention fairly late in a company’s Solvency II preparation process, Pillar Three deals with reporting requirements - to regulators and the public.

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Solvency II Pillar Two: Corporate Governance:  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. Consistent with the principles of ERM, 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.

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Solvency II Pillar One: Capital Requirements: 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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