Review
Financial management
Solvency II
Solvency II is an EU-wide initiative aimed at overhauling the regulation of all life and non-life insurers by 2012. One of the objectives is to introduce a more risk-based approach to regulation with strong incentives for firms to internally assess their own solvency capital requirements. To this extent there are a number of similarities with current FSA rules which require all insurance firms to produce an Individual Capital Assessment (ICA).
However, Solvency II goes much further by trying to instil a high standard of risk management and governance within each insurer. EU regulators have recognised that risk models and associated metrics are only as good as the risk management framework that surrounds them. In short, Solvency II is about influencing the ‘risk culture’ of the firm across the whole organisation.
At Amlin we believe that we are well placed to face the challenges posed by the new regulations. For example, we have been proactive in participating in recent ‘Quantitative Impact Studies’ (QIS) which have been organised by European supervisors to understand how Solvency II might affect insurers’ balance sheets. Within Amlin, Solvency II is a Group-wide initiative drawing on resources from across the organisation, and dovetailing with other ongoing projects. Crucially, we do not see Solvency II as a pure compliance exercise. Instead, adherence to Solvency II principles is a by-product of having a well run company, with risk management fully integrated into the decision-making processes.
For many firms, the proposals may materially alter the perceived financial strength of the company. The balance sheet is re-stated on market consistent principles, with insurance liabilities valued on an actuarial best estimate basis and discounted for future investment income. In Amlin’s case, this should result in the substantial reserve margins carried being realised as an explicit asset for solvency purposes.
Capital requirements are determined either by a standard formula or an ‘Internal Model’ which has been pre-approved by the regulator. The design of the standard formula is yet to be finalised; it is likely to be calibrated to encourage the firm to develop its own internal model. Like Amlin, many firms are consequently aiming for early model approval. Yet latest indications are that those firms that fail to recognise Solvency II as an opportunity, rather than a regulatory burden, may fail to reach this goal. At this stage, regardless of whether model approval is attained or not, Amlin does not expect the new regulations to place an additional burden on the capital resources of the firm. This view is supported by the latest QIS results for Syndicate 2001, which indicated that whilst there may be an increase in regulatory capital (using the standard formula), this is offset by a substantial increase in available surplus through the recognition of reserve margins and credits for discounts.
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