Deloitte and Towers Perrin issue rallying call to Solvency II study
Consultants Deloitte and Towers Perrin have publicly urged UK insurance firms to participate in the fourth Solvency II Quantitative Impact Study (QIS) being conducted by the European Commission between April and July 2008. Deloitte suggested that failure of sufficient insurers to participate could threaten the future of London as an insurance centre.
“QIS4 represents a strategic opportunity for insurers across Europe to understand and influence Solvency II and we would recommend as many insurers as possible take part,” said Naren Persad, senior consultant for the Tillinghast business of Towers Perrin. “The decisions on Solvency II are being made now, and QIS4 really is an excellent opportunity to provide feedback to the EU Commission on how Solvency II will affect their balance sheet. If companies need changes to be made, now is the time to identify these and to speak up.”
“Some larger companies are already preparing for Solvency II,” continued Persad. “But the results of QIS4 could significantly affect insurance groups, small companies and international writers. This is an important opportunity for companies that might not have focused on the regulation yet, to get involved and ramp up their preparation for the new regime. Taking part may well require investment, but participants benefit from understanding the implications of the proposals on their businesses and from improvements to the regulatory framework that may result from their feedback.”
Inappropriate for captives
As it stands now, Solvency II is not a captive-friendly framework and captive owners need to raise their concerns with the proposed directive, experts advise. The ‘spirit and philosophy’ of the Solvency II directive, which is scheduled to be implemented in 2012, does not fit captives, said Mark Lauer, chief operating officer at Foyer SA, a Luxembourg-based insurer.
Sources believe most captives will see their capital needs increase under the directive, although some may find the new requirements will allow them to decrease their capital if they desire. Administrative costs for captives are also likely to rise under the directive, according to market sources, and additional services from auditors and actuaries will be needed to comply with the new regulations.
In addition, captive owners have largely ignored the quantitative impact studies that the European Commission has carried out to help gauge the effect of Solvency II and address insurer and reinsurer concerns with the framework, Mr Lauer said. Captive owners have argued that the studies are too complicated, too time-consuming and not applicable to the business captives are writing, he said. But those concerns need to be heard, said Mr Lauer in urging captives to participate in the next round of quantitative studies from April to July.
Karel van Hulle, head of the European Commission’s insurance and pensions unit, agreed during a conference presentation that captive owners would do well to take part in the studies. A higher level of participation than in the previous three studies will, for example, help the Commission make decisions such as whether to keep the threshold for exemption at E5m in annual premiums, Mr van Hulle said.
Input from captive owners is also needed to work out issues including proportionality, how protected cell companies and their cells should be treated, and treatment of captives that are based outside the European Union but write coverage on risks within countries governed by Solvency II, Mr van Hulle said. “We need enough participation to see the problems so that we can address them,” he noted.
Specific areas addressed by QIS4
>> The extent of group diversification and transferability restrictions, which will be highly influential in the development of group supervision arrangements, including group support
>> Eligibility classifications for companies’ capital that affect the attractiveness and effectiveness of different capital instruments
>> The possibility of simplified Solvency II compliance for smaller companies. This seeks to address the issue that smaller insurers will find Solvency II compliance overly taxing.
Karel van Hulle
