Insurers that took part in the EU’s Solvency II implementation exercise will have an advantage over those that did not

Companies that participated in Solvency II’s latest testing exercise, QIS 4, will have a significant advantage moving into 2009, according to Towers Perrin.

Participation in QIS4 was higher than in the previous studies, and exceeded the targets defined by the EU Commission, with more than 1,400 companies taking part.

This still leaves approximately two-thirds of European insurers who did not participate. These companies are at a potential disadvantage as they will have significantly less understanding of how Solvency II might affect them, said Towers.

Although QIS4 has finished, companies can still perform the QIS4 calculations to enhance their understanding. In some countries, supervisors are actively encouraging this.

‘Preparing for Solvency II will be a complex process, and organisations that took part in QIS4 will have a much clearer picture of what they need to do,’ said John Charles, Principal within the Tillinghast insurance consulting business of Towers Perrin.

‘Insurers who weren’t able to take part in QIS4 earlier in the year could still benefit from running the exercise. Companies that do so will be better placed to understand Solvency II’s implications, including their capital position, and act accordingly,’ he said.

Both insurers and supervisors need to take account of the current economic environment when interpreting the QIS4 results.

'Looking ahead, 2009 is going to be a defining year for Solvency II, with a likely QIS5 exercise. The current credit crisis has demonstrated the need for insurers to perform robust risk management, making Solvency II more relevant than ever,' added Neil Chapman, senior consultant with Tillinghast.

‘Engaging the board and preparing for Solvency II will be key priorities next year,’ he said.

Towers Perrin said QIS4 raises a number of issues, including:

Calibration – getting this right, particularly not overstating risks on property and casualty business.

Providing an appropriate incentive for insurers to enhance their risk management by developing internal models.

The importance of reflecting group diversification effects.

Proportionality – simplifications that would allow Solvency II to be workable for all insurers, regardless of size.

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