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The Actuary The magazine of the Institute & Faculty of Actuaries

Response to Solvency II QIS5 results

The European Insurance and Occupational Pensions Authority’s (EIOPA) fifth quantitative impact study (QIS5) for Solvency II was published on 14 March 2011. Here we collate some of the comment from across the industry:

Financial Services Authority

’We remain committed to the principles behind Solvency II, i.e. market-consistent valuation of assets and liabilities, risk-sensitive calibration of capital requirements at an appropriate 99.5% VaR (value at risk) level, and capital of a sufficient quality. The results from QIS5 do not change our commitment to these principles.

There are some specific areas which have been uncovered by QIS5 where we are aware that a change from the specification from QIS5 would be useful, either on grounds of proportionality or appropriateness, and we are working within EIOPA and the European Commission to these ends.’


Association of British Insurers

Peter Vipond, Director of Financial Regulation & Taxation, ABI said:

"The QIS5 results are an important part of the design of Solvency II rules. However, we shouldn’t attribute too much weight to the results; it is a test of the system not of companies. The regulators must now work quickly to make amendments to the Level 2 implementing measures in light of the results. We are fast approaching the concluding stages of these and progress on these points must not be protracted.

"There remain a number of outstanding issues in Solvency II, particularly the treatment of some long term products which carry guarantees for consumers. We need some practical changes to the current rules so these can continue to be written for the benefit of consumers and in a way which is not pro-cyclical".

"The ABI and its members continue to support Solvency II and its aims and are committed to the 1 January 2013 implementation date. However, the current schedule (in view of Omnibus II) is on a knife edge in terms of what is practically achievable."



Philippe Guijarro, partner at PwC, said:

"QIS5 has shown that Solvency II will be more onerous than the existing regime. For insurance groups, the amount of free capital has reduced by €86bn. The industry remains sufficiently well capitalised and in a strong position. QIS5 also shows that the European insurance industry has high quality capital, with 92% of the available capital being classed at the highest quality possible.

The results show that, at present, only 15% of European insurers would fail to meet the minimum requirements and just 5% would risk having their licenses withdrawn. This percentage will almost certainly reduce as companies take steps over the next two years to address their capital position.

"Low use of internal models in QIS5 suggests insurance groups may not be as prepared as they could be. The high submission rate from UK insurers could mean they are ahead of the curve. PwC expects insurers to make a number of strategic and capital changes in light of the QIS5 results.

"We anticipate that a number of UK insurance groups will streamline their UK and possibly European group structures, which under the QIS5 standard formula measurement have attracted an additional capital charge of €40bn. Solvency II presents a real opportunity for companies to reduce capital and compliance costs, optimise available capital and align their group structures and we expect this to lead to an increase in M&A activity.

"We expect insurers to review their investment and debt-financing strategies as certain asset classes and debt instruments will carry higher capital charges or be classified differently under the directive. Additionally, higher capital charges will mean certain products become unprofitable, leading insurers to stop writing certain classes of business or re-designing some products. The results may also impact some firms’ decision to seek approval for the use of an internal model.

"QIS5 has brought the capital implications of Solvency II into sharp focus and left insurers with important decisions to make. Those companies that address the impacts too late will face difficult questions from investors, analysts and the market and will find it progressively difficult to rectify their capital situation before the 2013 deadline.

"The industry will be relieved that after such a large exercise a QIS6 is unlikely."


Towers Watson

Insurers to struggle with €86 billion less capital surplus under Solvency II unless internal models applied in preparation

The results showed that overall the insurance industry remains well capitalised under the QIS5 study.

Colin Murray, director at Towers Watson, said, "The results largely bear out our expectations from our work with clients. We welcome the fact that EIOPA clearly recognises the main outstanding issues in relation to the standard model and is working hard to resolve these. Nevertheless the timescales for resolving these issues is very tight and we would urge their swift resolution."

The QIS5 results revealed other important areas, according to EIOPA, which were not tested but require further attention of the industry in preparing for Solvency II. These areas are governance, risk management and reporting requirements.

Colin Murray said, "Solvency II is not just about risk measurement and quantification. Successfully responding to this new regulatory regime will depend much on the degree to which companies recognise and respond to their governance and risk management needs ahead of the 2013 deadline."



Ferdia Byrne, insurance partner at KPMG, said: "Overall the results demonstrate that the insurance industry as a whole is well capitalised, in line with the new requirements. Fears expressed by the industry in 2009 that massive capital increases would be required in the UK have not been borne out in practice. This is largely due to the extensive lobbying by industry to adjust the calibration, and an improvement in market conditions.

"However, a significant number of firms did not meet the requirements: 15% of participants across Europe, and 20% within the UK. EIOPA noted that there is a concentration of small insurers in this position.

"Companies have invested very significant resources in the development of their own internal models to determine the required capital levels. Interestingly, these models do not appear to result in a significant reduction in capital requirements for individual companies, although the results do show a material reduction in the group capital requirement when an internal model is used."

KPMG identified four key consequences of these results.

1. Some insurers will seek to reduce their exposure to certain types of assets. For example, corporate bonds attract significantly higher capital charges than sovereign debt despite the difference in risk profile of sovereign debt across the EU.

2. There will inevitably be further consolidation in the industry, driven by companies seeking to increase diversification, which is rewarded under Solvency II. In addition, we expect that companies struggling to meet the new capital requirements may look to merge with, or be acquired by, companies with higher levels of capital.

3. The new regime is based on fair values of assets and liabilities, and will inevitably bring volatility to traditional measures of financial strength. This will probably increase the use of hedging and reinsurance to manage the capital position.

4. Many companies operate multiple subsidiaries across the EU, which makes it more difficult to obtain credit for diversification. We expect more companies to change corporate structure, for example by using branches across the EU, thereby improving the capital efficiency of the business and reducing the number of regulators that they need to deal with.

Ferdia Byrne continued: "While overall participation was almost 70%, a significant increase on QIS 4, a substantial number of companies did not participate. This may be due to the complexity of the new regime and some companies may have been hoping for transitional measures for more time to catch up.

"The recent comments on the transitional framework announced under Omnibus II have led to confusion as to how widely transitional measures may be applied. In its letter to the Commission on the QIS 5 results, EIOPA has identified only three areas for transitional measures - third country equivalence, treatment of hybrid capital and subordinated debt and discount rates on technical provisions.

"Transitional measures are helpful to ensure a smooth transition to Solvency II. This additional clarification was needed and we note that the proposed transitional measures are limited.

Companies should not assume that transitional measures will delay Solvency II implementation and should continue to aim to be ready for a 1 January 2013 start date. This could be a significant challenge in some areas, especially as the European Parliament is not planning to finish its considerations of Omnibus II until November 2011."



Rick Lester, Deloitte’s UK Solvency II leader, said the results provide a valuable insight into the UK market’s preparation for the capital adequacy regime.

"Client experience has shown that individual results by entity and product line can depart from the average, due to each undertaking’s specific situation.

"Solvency II will have significant impacts on insurers’ strategies in terms of product, funding and investments. QIS5 results are now one of the best tools available to inform the necessary reviews, as they allow individual entities to position themselves against the market."

Commenting on participation rates, Michel de La Bellière, Deloitte’s EMEA Solvency II leader, added: "QIS5 is likely to be the last full-scale quantitative exercise before the date of Solvency II implementation. Reading the high participation rate in this light shows that most undertakings have now had the chance to measure what Solvency II will actually mean for their balance sheet, their solvency and ultimately, for their business".

Tamsin Abbey, Deloitte’s Solvency II partner in the UK, said: "QIS5 results show the impacts of these changes, the significance of which can vary between European markets and product lines, and are an important component in this establishment of a level playing field across Europe.

"Care will need to be taken in understanding the results as firms have interpreted the requirements differently. In addition, QIS5 also contributed to inform the search for a balance between the goal of achieving an economic measure of risks, and the expectation of keeping the Standard Formula simple enough."