Insurers may be cutting corners on QIS5

Over half of insurers operating in the UK are cutting corners on the QIS5 exercise and many of them are underestimating the time it will take to conduct, according to Towers Watson research.

QIS5, a comprehensive test of the new Solvency II regime, is scheduled between August and November this year and represents one of the last opportunities for the insurance industry to influence the design and calibration of the new regulatory regime.

Towers Watson's research found that less than half of insurance companies surveyed (43%) are looking to run QIS5 at 'near production standard' or higher.

With the impact of Solvency II increasingly a Board agenda and key topic for investors and analysts, the firm advises that insurers should try to complete QIS5 as close to production standard as possible.

Naren Persad, senior consultant at Towers Watson, said: "QIS5 is a major milestone for Solvency II. It represents one of the last opportunities for companies to test their understanding of the regulation and what it means for their business. It is also critical for identifying problem areas in terms of the insurer's practical ability to produce the required information. It can be easy to gloss over the detail of the 456 pages of the specification but stakeholders such as supervisors and the European Commission are expecting companies to complete QIS5 at a 'near production standard' as this ensures that the requirements being developed are achievable for companies in practice."

Towers Watson also found that almost half (45%) of insurers believed that taking part in QIS5 would take 100 person days or less, which is the average amount of time companies spent on QIS4 and far less than the amount of time currently spent on preparing results under the much less sophisticated Solvency I regime.

Persad added: "Insurers operating in the UK need to beware of significantly underestimating the time required for this exercise and we advise that they avoid leaving all the work until August. Given that a draft specification is already available, they should be conducting significant preparatory work ahead of the summer, in the order of 150 hours on average, with a particular focus on the availability of the necessary data and the alignment of the existing models with the QIS methodology. Organisations that leave all the work until August may see some cancelled summer holidays."

Other findings of Towers Watson's Solvency II survey are:

Insurers thought that determining the risk margin would be the most difficult aspect of the Solvency II balance sheet (30% said it was the most challenging area), followed closely by determining best estimate liability (29%) - challenges applicable to all insurers regardless of whether or not they are seeking internal model approval

Only 7% of insurers were definitely planning to publish their QIS5 results, with 58% saying that they were not intending to publish. The remaining 35% said they would publish results only if peers did so first

Regarding the Solvency II internal model validation process, 44% of insurers said that their current ICA process already combined independent internal validation and external validation

Insurers thought that the internal model validation process would be much harder than the ICA, with 61% saying that the effort involved would be double or more relative to the ICA