Solvency II is the newest compliance issue facing European insurers, setting minimum capital requirements for all lines of insurance. In a recent survey of European insurers conducted by Ernst & Young, Doug French, global director of E&Y's insurance and actuarial advisory service practice, notes 60 percent of the participants see Solvency II as more than just a compliance activity. "They see it as a bridge to enterprise risk management and economic capital concepts," he says.
European insurers are going to use Solvency II to further their movement toward enterprise risk management, French predicts, which will allow them to manage their business and make business decisions based on their view of risk.
As for technology, the biggest focus resulting from Solvency II is on the actuarial systems and actuarial models, asserts French. The current systems and models will have to be rebuilt to deal with the stochastic modeling requirement of the regulatory issue, he indicates. "Most people buy those systems from outside vendors, but the methodologies will change, and you will not be just complying factors to in-force inventories," he says. "You are going to be doing stochastic analysis around the risk elements of your business, and you will be using it to drive a distribution of possible outcomes that will set your economic capital."
The other technology needs insurers will deal with involve data consistency, quality, and governance. "People are going to have to build better and more robust databases to set assumptions for their modeling activity," says French.
Improved skills for those working in technology, risk management, and the actuarial field also will be required, he points out, adding, "It's going to be a different environment for everyone. The IT folks are going to be dealing with more pressure as they deal with actuarial systems and put them in a high-performance computing environment."
While there are few U.S.-based insurers that operate in Europe, French believes the more important issue domestically concerning Solvency II is how American insurers will react to the European companies that own insurance enterprises in the U.S. "If you look by assets, 15 percent of the life insurance industry in the U.S. is owned by Europeans," he says. "If you look at premium, it's about five percent for property/casualty."
Some of the European-owned insurers in this country are big companies, French continues, and U.S. insurers are going to need to understand how capital management works because the Europeans aregoing to be making decisions on their U.S. business based on a capital regime in Europe. "It's going to be important to understand solvency requirements and how they compare with [American requirements]," says French. "The amount of capital affects the return on capital, which then affects the pricing of products."
While members of the European Union still are putting together the final touches on Solvency II, French explains insurers will have until 2010 to reach full implementation. Drafts are being issued, and there are several matters around methodologies that have to be settled. "It probably will take another year before people know exactly how the calculation methodologies work," he says.
For the most part, European insurers are supportive of Solvency II. In the U.S., insurers deal with state regulation, but French believes state regulators are moving slower than European regulators on issues such as solvency. U.S. regulators also work on a product-by-product basis. "That's not the way the Europeans are going to deal with it," he says. "The methodologies will go across both life and P&C."
French is impressed with how the European carriers are reacting to Solvency II. "The thing you see in the [E&Y] survey is everyone is doing something about it," he says. "[The Europeans] know the world has changed, and there is going to be some type of solvency regime."
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