Companies plan to develop internal models
Solvency II presents insurers with opportunities to step beyond sole regulatory compliance and develop a competitive advantage, according to Towers Watson.
According to the company's biennial Insurance Industry ERM survey a significant majority of insurers indicate that they intend to develop internal models for at least some risks.
Towers Watson said that internal models should enable companies to understand and manage risk better and therefore reduce the likelihood of unwanted surprises.
Paul Whitlock, Managing Director at Towers Watson, said: "There will undoubtedly be a period of transition as the new Solvency II framework beds down but looking beyond this there will be many opportunities for insurers.
He added that not only does Solvency II allow companies to adopt and take credit for sophisticated risk management, it also meant that companies could gain competitive advantage by optimising their capital position taking into account diversification effects and various risk mitigation strategies.
“We have already seen some activity in this area as some companies have been restructuring in order to maximise the advantages under the new framework."
Solvency II also create opportunities in product innovation and cross border business, according to Tower Watson.
Whitlock said: "Product design may change as companies begin to design new products with a different balance of risks between insurance companies and policyholders. Market-based approaches also encourage transparency in pricing. In the longer term this may result in greater choice for policyholders as insurers design a range of products to satisfy individual policyholder demands."
Solvency II makes cross border business easier within the European Economic Area and this provides opportunities for companies to expand via organic growth or acquisitions. However, companies best placed to take advantage of any of these opportunities will be those who develop a fully functioning enterprise risk management (ERM) framework. Such companies will be able to analyse the emerging risk environment and act in advance of their peers.
