Most E.U. Insurers Pass Solvency II Stress Test

The vast majority of European insurers and reinsurers remained financially “robust” in a test of their ability to withstand various economic shocks, but up to 10% failed to meet their minimum capital requirement under Solvency II, the European insurance regulator said.

The Frankfurt, Germany-based European Insurance and pass_failOccupational Pensions Authority said 221 insurance and reinsurance groups and companies in the European Union, the European Economic Area and Switzerland—with a market share of about 60%— took part in the study testing their ability to maintain minimum capital levels despite macroeconomic shocks that include inflation, interest rates, credit and insurance risks.

Participating insurers’ aggregate solvency surplus was E425 billion ($606.18 billion) before EIOPA applied the stress test scenarios.

Under a stress test to gauge insurers’ reaction to inflation, their combined surplus fell to E367 billion ($419.35 billion) and 8% of participants would fail to meet minimum capital requirements under Solvency II, the insurance regulator said.

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Solvency II Implementation Likely Delayed a Year

BRUSSELS—It appears likely that full implementation of Solvency II will be delayed a year, but experts say insurers, reinsurers and executives overseeing company-owned captives should continue working to comply with Europe’s revamped risk-based capital rules.

While the most recent deadline to implement Solvency II was Jan. 1, 2013, the Council of the European Union recommended delaying full implementation of the rules until 2014 in a “presidency compromise” that was reached in late June. Under the council’s proposed compromise on the Omnibus II directive, which proposes transitional arrangements to adopting Solvency II, regulators would not have to transpose Solvency II into national laws until March 31, 2013, and the Solvency I rules would not be repealed until Jan. 1, 2014.

In the compromise plan, the council also recommended that insurers and reinsurers be able to gain formal regulatory approval of tools such as internal models in the latter half of 2013, but with an effective date of Jan. 1, 2014. Under the plan, regulators would require insurers and reinsurers to provide an implementation plan by July 1, 2013, that includes evidence of the progress they have made toward complying with Solvency II. Continue reading Solvency II Implementation Likely Delayed a Year

Solvency II: Complex Engineering Task Creates ‘Skills Crunch’

The Solvency II regulations do not come into force until January 1 2013, but insurance companies have been making detailed preparations and running complex modelling processes for several years. This has produced a surge in demand for qualified people who understand what the new rules require, and actuaries in particular.

To pass the exams to become an associate or fellow of the Institute and Faculty of Actuaries takes between three and six years, according to The Actuarial Profession, the body that represents the industry. All but a few candidates also hold down a full-time job while doing this. This Solvency II skills crunch is having a marked effect on salaries. While an actuary working with a City insurance company can earn more than £100,000 a year, the demand for key staff means the most sought-after professionals can command double that. According to The Actuarial Profession, the average salary for a chief actuary in the UK was £184,000 in 2009-10.

Jim Bichard, partner in the insurance regulatory practice at PwC, the consultancy, agrees that Solvency II has created a “skills crunch”. Mr Bichard says of people with key skills related to Solvency II: “They are in a two-year period when they can really command almost whatever price they want.”

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EU to Give Insurance Industry More Time to Prepare for Solvency II

European Union regulators look set to bow to insurance industry demands for more time to adjust to new solvency rules, with the head of the EU’s insurance watchdog acknowledging that some of the measures would have to be phased in beyond an official start date of 2013.

Some insurers have complained of big open questions to be resolved before the beginning of 2013, when the so-called Solvency II rules are due to enter force. The rules aim to better protect consumers by more closely aligning insurers’ capital cushions to the risks on their books.

Rules on the treatment of hybrid capital, liquidity considerations, regulatory reporting requirements and the treatment of foreign subsidiaries in solvency tests are all candidates for staggered introduction, industry officials say.

Bernardino declined to discuss the areas that might be phased in from 2013, but said smaller insurers in particular needed time to adjust to the new rules.

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Solvency II: Rules Changes Will Lead to Greater Burdens

The European insurance industry is fast approaching the deadline for what was supposed to be the final test of the new capital rules, known as Solvency II, that are due to come into force at the start of 2013.

The new rules, which are designed to create a better match between the capital that insurers hold and the risks that they take, will do much more than merely set different capital requirements for insurers.
The bigger impact will be the requirement to demonstrate that all risk management processes are fully embedded in their decision making and operations.

George Culmer, chief financial officer of RSA, the UK insurer, says that one concern with all the extra reporting requirements is that insurers will be unable to see the wood for the trees.
For many companies, this will entail not only overhauling their risk management, but also ensuring each element is fully documented and reportable to their regulator.

Copyright The Financial Times Limited 2011.

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Lloyd’s Group Says Solvency II Drives Rising Use of Actuaries

With the approach of Solvency II in the European Union, the Lloyd’s market is making greater use of actuarial skills, according to the Lloyd’s Market Association, which represents Lloyd’s managing agents.

During the past three years, the LMA said in its 2010 market survey, Lloyd’s managing agents have increased the size of their actuarial operations by 49%.

The survey, which was based on replies from 50 of the 53 managing agents at Lloyd’s, said 382 people are performing actuarial duties within the respondent group.

This is up from 256 in 2007, said the LMA, which predicted the total would rise by another 10% by the end of 2011.

“The requirements of Solvency II [are] one of the main drivers behind the increase,” the LMA said in a statement. “The demand for better management information coupled with greater demands by regulators also drove the demand for actuarial talent.”

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‘Insurance Accounting Proposal Includes Liquidity Premium’

Apparently yielding to the global demand for a change in the basis for calculating Companies’ Income Tax for insurance firms, the International Accounting Standards Board (IASB) has included liquidity premium in new proposals for insurance company accounting standards.

The proposal is expected to engender a shift from the more market consistent exit value-based approach whereby values of asset and liability reflect the cash required to liquidate them in line with the last draft in 2007.

The proposal was originally intended to be applied in Solvency II only to annuity contracts that cannot be lapsed or transferred and are therefore considered illiquid but it will now apply in different degrees to all insurance liabilities over one year in length.

The controversial premium would be added to the discount rate for liabilities, thereby decreasing their value notwithstanding the fact that its inclusion in the Solvency II directive caused uproar and accusations of protectionism because annuities providers in the United Kingdom will benefit most from it.

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