QIS5 capital requirements “radically reduced”

European Commission's fifth Quantitative Impact Study (QIS5) draft specifications provide significant relief to insurance industry, according to experts.

Charles Garnsworthy, partner, PricewaterhouseCoopers (PwC), said: "This represents a significant victory for the industry as the Commission's proposals around capital levels go much further than many in the industry expected. The Commission has clearly responded to the concerns of the insurance industry by radically reducing the required capital for QIS5. This will be a source of great relief to those currently grappling with Solvency II requirements."

"Despite downward revisions for the amount of capital insurers will need under QIS5, there is still a clear opportunity for further revision during the consultation process and indeed before the final level 2 implementing measures are adopted. It's therefore crucial insurers move on this now to ensure the transition to Solvency II does not give rise to inappropriate increases in capital requirements."

PwC has also highlighted that the Commission's proposals on illiquidity premium will provide significant relief to many in the industry.

Products are to be classed in three buckets. Insurers with significant annuity portfolios will be pleased as these specifications allow 100% of an illiquidity premium to be taken into account, reducing the provisions otherwise required. Furthermore, a significant large number of products will be valued with a 50% illiquidity premium. This reverses the previous advice from CEIOPS, which had not allowed for an illiquidity premium in its recommendations. In addition, transitional measures are being proposed for existing business which would alleviate capital pressures further.

The calibration of the standard formula Solvency Capital Requirement (SCR) has been reduced from what CEIOPS proposed but it is still above QIS4. However, there is a clear opportunity for further revision during the consultation process and indeed before the final level 2 implementing measures are adopted. There was some relief in the calibrations for operational risk and premium and reserve risk, which will reduce non-life insurers' capital requirements. Shocks for equity stresses have also been reduced.

There are also some significant changes to 'own funds' - the capital that can be counted to meet the requirements. Particularly important are the reclassification of future profits and the winding-up gap as eligible for treatment as the higher quality Tier 1 rather than the more restricted Tier 3 capital.

Charles Garnsworthy, partner, PricewaterhouseCoopers LLP, said: "QIS5 is the last chance for insurers to assess the likely impact on their capital requirements using the standard formula. This will provide crucial feedback for the standard setters to ensure the transition to Solvency II does not give rise to inappropriate increases in capital requirements. This exercise will involve significant effort across European insurers at a time when most are working hard to lay the foundations for implementation of the wider Solvency II requirements but we would encourage them to move on this as soon as is possible’.