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Here we highlight the top stories from Guy Carpenter’s Financial Intelligence Team that appeared on GCCapitalIdeas.com in 2010.

QIS5 - Premium and Reserve Risk: Sufficient Consideration of Non-proportional Reinsurance?  On July 6, 2010 the Committee of European Insurance and Occupational Pensions Supervisors published the technical specification for the latest Solvency II Quantitative Impact Study (QIS) 5. QIS5 is scheduled to be carried out from August to November of 2010, with a report summarizing the results scheduled for release in April of 2011. Regarding the non-life premium and reserve and risk, Guy Carpenter & Company, LLC has observed a return to capital requirements more in line with QIS4 and an implicit incentive for the use of an internal model.

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Solvency II - Non-Life Underwriting Risk in Light of QIS 5: On April 15th, 2010, the European Commission (EC) published its draft technical specifications for the next Quantitative Impact Study (QIS) 5, which will be implemented from August to November of 2010. Based on empirical evidence, the general calibration of the standard formula solvency capital requirement (SCR) may fall between the calibration of QIS 4 and the calibration seen in the rigid proposals of the various consultation papers (CP) submitted during 2009. This article takes a deeper look at the calibration of non-life underwriting risk as part of the overall SCR calculation.

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Solvency II - Approval of Internal Models:   The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published many consultation papers in 2009 focusing on Level 2 implementation measures for Solvency II. Consultation Paper (CP) 37 addressed the procedures for approval of internal models. It was followed by a final paper entitled “CEIOPS Advice for Level 2 Implementing Measures on Solvency II ‘The procedure to be followed for the approval of an internal model’”, published in October, 2009.

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Frank Achtert, Managing Director, Financial Intelligence Team, and Sebastien Portmann, Vice President, Financial Intelligence Team
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On July 6, 2010 the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published the technical specification for the latest Solvency II Quantitative Impact Study (QIS) 5. QIS5 is scheduled to be carried out from August to November of 2010, with a report summarizing the results scheduled for release in April of 2011. Regarding the non-life premium and reserve and risk, Guy Carpenter & Company, LLC has observed a return to capital requirements more in line with QIS4 and an implicit incentive for the use of an internal model.

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With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

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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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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The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) refined the evaluation of non-life catastrophe risks under Solvency II in its Consultation Paper 48 “SCR Standard Formula: Non-Life Underwriting Risk” issued in July 2009.

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Frank Achtert, Managing Director, Financial Intelligence Team
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The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its second set of Consultation Papers on Level 2 implementation measures for the Solvency II Directive in July 2009. These papers were open for comment until September 11, 2009. CEIOPS received more than 20,000 comments from 105 stakeholders, demonstrating the importance (and explosiveness) of the ongoing Solvency II discussion.

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Financial Intelligence Team
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For Solvency II compliance, future management actions are primarily relevant in life insurance and should be reflected in the assessment of cash-flows (e.g., changes in asset allocations, bonus rates).

The list of assumptions made on management actions provided by QIS 4 participants was deemed “to be indicative but not comprehensive or useful” by CEIOPS and thus has not been incorporated into CP32.

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Introduction

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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Financial Intelligence Team
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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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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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Financial and Capital Advisory
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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.

Continue reading…