David Lewin, Managing Director
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The worldwide economic downturn has had a huge effect on the Dutch economy. Many companies in the Netherlands face the risk of bankruptcy. In 2009 almost 11,000 enterprises were declared bankrupt, an increase of more than 51 percent compared with 2008. A similar number of companies are expected to enter bankruptcy in 2010. An even greater number of companies will be affected as they become entwined with the insolvencies of their contractual counterparties.

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Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Group support will not be permitted when Solvency II becomes effective in 2012. As a result, the flexibility to use capital held anywhere in the group in calculating the Solvency Capital Requirement (SCR) will not be available. Rather, each entity will have to calculate its SCR based on the capital it has, regardless of its group’s position as a whole. This last-minute change to eliminate group support could prompt some European insurance groups to change their structures - or at least rethink how much risk they will take in each entity.

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Henry Keeling, President and CEO of Guy Carpenter’s International Operations
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The emerging consensus seems to be that Solvency II will cost a lot and make the (re)insurance business more complicated. If conventional approaches to regulatory compliance are applied, this is likely to be true. After all, compliance tends to be seen as just another expense. This does not have to be the case for Solvency II, however. Choosing the right approach could free capital for investment elsewhere, ultimately resulting in a competitive advantage. “Competitive compliance,” consequently, can create an upside where most would perceive only a cost to be managed.

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David Lewin, Managing Director
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When problems in the subprime mortgage market erupted into a full financial catastrophe last year, conventional wisdom suggested that property and casualty (P&C) insurance companies would suffer. The culprit, many believed, would not be investments in mortgage-backed securities (MBS) like the life insurers. Rather, it would be the possibility of slipped bond ratings because of problems with bond insurers, ultimately lowering the value of the bonds held in P&C investment portfolios. The increase in insured losses as a direct result of subprime and the ensuing credit crunch would certainly drive P&C companies to have poor returns, the thinking continued. Even at the mid-point of 2008, talk of a turn in the market began to percolate.

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Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Lately, discussion about the use of capital models in Europe has been driven by Solvency II. A major regulation is on the horizon and is progressively introducing considerable change in the how the insurance industry will manage risk. Important investment has already begun and will continue, as companies have to integrate this new regulatory regime in their management approaches. With Solvency II compliance driving the adoption of economic capital models, though, many (re)insurers could miss an opportunity to secure a competitive advantage. Instead of using compliance as the impetus for capital modeling, strategy should come first.

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Preview: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its first set of Consultation Papers, 12 in all, on Level 2 Implementing Measures on Solvency II in March. These drafts have been developed to expand on the general approach outlined in the Solvency II Directive Proposal that was adopted in December 2008. The second set of 24 papers was published by CEIOPS at the beginning of July. The third set is scheduled for November-to-December 2009.

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Transparency and Accountability for Supervisors: Consultation Paper No. 34 addresses transparency and accountability for supervisors, expanding on Article 30 of the Solvency II Directive. The Paper aims to make information related to supervision available in a timely manner to all interested parties. Its two main objectives — effectiveness of supervision and convergence of supervisory practice — are achieved by facilitating the interaction between the regulator and the supervised entity, ensuring the transparency of supervisory requirements, and providing easy access to the disclosed information. The result is to facilitate the comparison of supervisory approaches.

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Financial Intelligence Team
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Each (re)insurer’s system of governance should:

• Establish and maintain effective cooperation, internal reporting and communication at all relevant levels.
• Have a clear, consistent and documented organizational structure.
• Establish, implement and maintain decision-making procedures
• Establish information systems that produce sufficient and relevant information concerning all business activities and risks to which the entity is exposed.
• Establish and maintain adequate risk management, compliance, internal audit and actuarial functions.

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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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David Lewin, Managing Director
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Financial Crisis: Impact on Casualty Insurance

Claims under credit insurance policies have increased dramatically to the point that it is difficult — if not impossible — to purchase cover in the reinsurance market. For this reason, the Spanish government has authorized the Consorcio de Compensación de Seguros (CCS), a Government-owned insurance entity in charge of compensating carriers for extraordinary risks, to reinsure credit and bond risks covered by local insurers. This demonstrates clearly how seriously the credit crunch has affected trade and real estate business — and consequently the related insurance lines.

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Financial Intelligence Team
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Prior to the recent turbulence in the financial markets, insurers and reinsurers were increasing their use of Enterprise Risk Management (ERM) to make risk and capital management decisions. While this was driven in part by rating agencies and regulators, many carriers began to recognize the value of metric-based frameworks and capital models in evaluating their portfolios.

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