The concept of equivalence under Solvency II determines to what extent (re)insurance entities outside Europe can operate within the European Union (EU) while relying solely on their local solvency standards. The ability to operate in the EU is a significant issue that impacts multinational (re)insurance companies and groups.
Posts Tagged ‘Solvency II’
Eric Paire, Head of Global Partners & Strategic Advisory, EMEA
Movement Within Capital Ratios Leading to Uncertainty Amongst Mid-Size Companies
The impact of the Solvency II capital ratio on composite life and property/casualty balance sheets is proving more substantial than some companies initially expected, according to Eric Paire, Head of Global Partners & Strategic Advisory, EMEA at Guy Carpenter. This development is due to the double impact of market volatility and volatility within the solvency ratio itself.
As discussed in the Executive Summary of this report, the term “crystalization of risk” refers to the timescale over which we realize that the risk is manifesting itself and how this view changes until ultimate understanding of quantum is reached and all liabilities are discharged. The “Reserving Risks” section in last year’s report, Ahead of the Curve: Understanding Emerging Risks looked at how information emerges in the presence of reserving cycles. The profit or loss in any particular financial year is made up of not only the profit or loss from the same accident year but also any recognized changes in the reserves on prior years.
Here we review recent GC Capital Ideas posts examining the benefits to (re)insurers adopting Own Risk and Solvency Assessment (ORSA) standards.
In realizing the goal of profitable growth, (re)insurers require a trusted partner to help them manage a rapidly evolving regulatory and rating agency environment.
The regulatory issues facing insurers and reinsurers today often require highly specialized expertise that may not be readily accessible to clients - from taking credit for reinsurance on financial statements to complying with regulatory requirements in contract wordings to shepherding new products through the approval process. Guy Carpenter Strategic Advisory℠ has a team of professionals whose deep expertise and knowledge can help companies navigate the regulatory realm.
Current capital requirements in the United States are set at a legal-entity level. Yet there are currently no global requirements for companies that operate in more than one country, and calculation formulas for capital requirements typically vary in each jurisdiction. Solvency II is the closest to mandating a group standard. Solvency II uses the concept of “equivalence” to deal with differing capital regimes between the European Union and the rest of the world including the United States, instead of forcing Solvency II standards on a third country.
Addressing Own Risk and Solvency Assessment/Enterprise Risk Management and Insurance Capital Standard Globally
In accordance with the objectives of the National Association of Insurance Commissioners (NAIC) and European Insurance and Occupational Pension Authority (EIOPA), Own Risk and Solvency Assessment (ORSA) is “people and risk-centric,” primarily employing a principles-based approach, as opposed to a rules-based approach. This means that decisions on matters related to risks are largely based on the judgment of individuals relying on underlying facts, as opposed to decisions being made mostly by following intricate sets of rules. This is similar to the principles-based approach taken by International Financial Reporting Standards (IFRS). Although the calculation of the Solvency Capital Requirements (SCR) under Solvency II is rules based, like Insurance Capital Standard (ICS), Solvency II can be a “one size fits all” rules-based approach to capital, especially if the standard formula is used. (Re)insurers will need to find a way to incorporate ICS into their ORSA processes and the vehicle to accomplish this may be through the internal model.
Own Risk and Solvency Assessment (ORSA) was first introduced as a regulatory requirement as a result of Solvency II. (Re)insurers would be wise to take note of the many similarities between Solvency II and the National Association of Insurance Commissioners’ (NAIC) ORSA and, where possible, avoid reinventing the wheel when trying to implement them. Now, and especially with the introduction of the Insurance Capital Standard (ICS), it is increasingly important for (re)insurers to avoid unnecessary, redundant and duplicative activity in the attainment of regulatory satisfaction by striving for a uniform framework to establish risk management and controls, corporate governance, transparency and disclosures across borders. In so doing, (re)insurers will gain optimum value from their ORSA.
There is very little doubt that (re)insurers face and will continue to face growing regulation and scrutiny both domestically and internationally. Therefore, (re)insurers should seek the most effective and efficient way to meet the growing demands of increased global regulation. What follows below is a brief discussion of the overlap of some of these new global regulatory requirements and thoughts on how (re)insurers might go about approaching them.