pwc-insurance-070411

QIS5 is the final and most comprehensive road test of Solvency II’s requirements and gives the best picture of the likely solvency position of insurers under Solvency II’s requirements which come into force in January 2013.
• Discount rates on technical provisions
However, EIOPA is concerned that too many transitional arrangements or over long transitional periods could jeopardise the timely implementation of Solvency II and have adverse effects on competition. For example, EIOPA has not suggested a need for transitional measures in respect of the calibration of the SCR.
All the figures above represent panEuropean averages. In practice the impact on surplus capital of the move to Solvency II will vary between countries and between individual insurers within countries. Insurers may want to consider both the absolute impact on their solvency position of the move to Solvency II and also, taking account of the data published in the QIS5 report, how they anticipate their position will move relative to their peers.
What is likely to change as a result of QIS5?
Concerns remain around the calibration of certain elements of the standard formula SCR and in a number of areas participants found the calculations overly complex. In addition, concerns were raised over some aspects of the calculation of technical provisions and regarding the valuation of certain assets and other liabilities. A summary of some of the specific concerns highlighted is set out in Appendix 1.
The draft Omnibus II Directive provides a framework for transitional measures in a wide number of areas . However, it appears EIOPA may support a narrower scope and duration of transitionals. Whilst it will be for the Commission to determine the nature and extent of the proposed transitional measures, insurers should certainly not assume that transitionals will be brought forward to the maximum extent possible under Omnibus II.
/lu/insurance
04 April 2011
Hot Topic: Understanding
the implications of QIS5
Summary
On 14 March 2011 the European Insurance and Occupational Pensions Authority (EIOPA) published the results of the fifth Quantitative Impact Study (QIS5) for Solvency II. QIS5 was conducted between August and November 2010 to assess the impact of the revised valuation rules and the Solvency II capital requirements on the European insurance industry.
Transitional arrangements
EIOPA concludes that transitional arrangements will be needed in the following areas:
• ‘Equivalence’ of third countries
• Hybrid capital and subordinated debt
QIS6 is not on the cards
EIOPA indicates that QIS5 will be the last fully comprehensive QIS exercise before Solvency II implementation. Some areas require further work but this work is to be done through specific tests and targeted work rather than another QIS exercise.
The findings of QIS5 will influence the European Commission in finalising its proposals, due to be published in June 2011, as to how Solvency II will be implemented. Whilst in many areas EIOPA’s report indicates that the requirements tested in QIS5 were broadly appropriate, there are a number of significant areas identified where further changes are likely.
Results show an average 12% reduction in insurers’ lvency I. 15% of participants reported a deficit against Solvency II’s standard formula Solvency Capital Requirement (SCR).
Why are QIS5 results important
68% of entities within Solvency II’s scope participated in QIS5. The level of granularity required from the exercise coupled with the high level of participation means that the results should give the firmest indication yet of Solvency II’s requirements.
What are the key messages?
Capital position
EIOPA’s view is that the European insurance industry remains ‘well capitalised’ under Solvency II’s requirements. However, QIS5 has shown that Solvency II’s capital requirements will, for many, be more onerous than the existing regime.
The focus of QIS5 was on testing the standard formula SCR. In practice, insurers may instead use full or partial internal models to calculate their capital requirements. Whilst QIS5 sought to gather information from insurers planning to use internal models, comparatively few submitted information on this basis (perhaps reflecting that, even where internal models are planned to be used, in many cases those models are not yet finalised). As a result EIOPA concluded that QIS5 did not allow conclusions to be drawn as to how internal model capital requirements compare with those under the standard formula.