May 2012

Barnett Waddingham Solvency II Survey

 

Barnett Waddingham conducted its second survey into Solvency II. Last year’s survey was focused on QIS5 and this year have we covered all three pillars of Solvency II.

Responses were received from a wide range of insurers; from captives to listed companies.

The survey revealed:

• Insurance companies are getting on top of Pillar 1 - the design, creation and testing stages of the internal model approval process are progressing well but validation and documentation need further work
• 55% of respondents said they are behind schedule with their Own Risk Solvency Assessment (ORSA) but 87% of respondents said that their attention will now be on implementing their ORSA
• The practical implementation aspects of the ORSA were identified as being the most challenging: 71% indicated that they have had problems translating the technical requirements of the ORSA into a practical plan
• 68% of respondents indicated that they will now be devoting more time to meeting reporting requirements
• 45% of respondents do not have the required data readily available and only 26% have started considering the narrative content
• 53% of insurance companies who responded have not yet considered the impact of Solvency II on the management of its defined benefit pension scheme
• The uncertainty surrounding Solvency II has impacted the availability of resources for 97% of insurance companies that completed the survey and 60% responded that it has had a negative impact on their Solvency II project

 

Detailed Findings

Only 24% of respondents said that they were confident or very confident that Solvency II will be implemented on 1 January 2014, highlighting the market’s continued uncertainty regarding the ultimate deadline. This is not unexpected when, at this late stage, there is still debate about key issues.  A key question is whether this lack of confidence is filtering down and impacting project implementation. We questioned firms on this and 60% said that uncertainty is having a negative impact on their implementation.

We asked firms how long they thought they needed between the date of transposition and the date of implementation to get ready for Solvency II. Only 29% thought that six months or less would be achievable. 35% said that they would require more than twelve months. Given recent reports suggesting that transposition will be delayed to 30 June 2013, allowing firms only six months to complete their transition, our survey suggests that 71% of firms will not be ready in time for implementation on 1 January 2014.

Firms with internal models believe they are doing well with the design, creation and testing of their models with over 85% progressing in line with their expectations. The area proving to be the most challenging, as indicated by 73% of respondents, is the validation of the internal model. 80% of firms are using, or planning to use, internal resources to validate their model. This is understandable since in many cases external resources have been used to develop and build such models. However, it does raise the question of independence, a key requirement of the validation process, and the FSA raised concerns about this at their conference in February 2012. The FSA also said that where models were being validated internally and where this was deemed to be independent there were questions about whether the validators had the appropriate skills, particularly for the more complex elements. In general, the FSA raised concerns over the depth and breadth of then validation process so this will be a key area for Internal Model firms to focus on.

ORSA is an area where work is still in progress for the majority of firms, with only a handful having completed all aspects. Respondents generally had a neutral response when considering whether the Level 3 guidelines are appropriate. This is probably due to the guidelines being focussed on what the ORSA should achieve rather than how the ORSA is performed. This is backed up with 71% of firms saying that the key problem with developing their ORSA is translating the requirements into a practical plan. 53% of respondents said that the daily monitoring of the regulatory capital requirements will be the most difficult aspect to meet.

We asked firms what aspects of the reporting templates they had concerns with and though the general response was positive, 45% of firms said that they did not have sufficient data to meet the requirements. 32% have not yet considered how they are going to meet the reporting requirements, which could mean that reporting issues have not yet been identified.

An area that we found particularly interesting was that 53% of firms in the survey that have a Defined Benefit pension scheme have not yet considered the impact of the Solvency II on the management of the schemes.

We asked firms what their next steps were for their Solvency II projects: ORSA and reporting were top of the list, which is unsurprising since approximately 55% of respondents are behind schedule with these areas. 71% of firms will be looking to improve their internal processes and data collection in the run up to implementation, 50% would be looking at investment strategy and 32% at reinsurance.

 

Conclusion

Despite there still being uncertainty surrounding the final rules for a range of elements in the new regime, companies believe they are progressing well and are working towards implementation. There has been a push to get on top of the quantitative side but we have concerns that there has not been enough focus on what exactly Solvency II means to a business. For Solvency II to be of benefit to the industry it needs to add value. Firms should consider the strategic implications of their results and not just the effect on the balance sheet. This will involve reviewing the investment strategy, reinsurance arrangements and business mix. All departments of an insurance company need to be involved in Solvency II, not just the Solvency II project teams.

 

Kim Durniat

Barnett Waddingham

 

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