Time on our hands?

The Insurance Times Solvency II roundtable created a lively debate on the challenges facing the insurance sector as the 2012 deadline for the new regulatory regime draws closer. Held at the Eight members club in Change Alley in the City, the event was chaired by Lansons Communications director Richard Hobbs and editor-in-chief of Insurance Times, Tom Broughton.

Brit Insurance’s programme solvency director for Solvency II, Toby Ducker, suggested that the looming deadline presented two major issues for insurers. “There’s the internal model itself, and how that’s really going to work in practice … and obviously, there is the underlying economic capital requirement as well, through the minimal capital requirement and solvency capital requirement, and where that’s going to end up.”

Hobbs asked if there were outstanding questions for insurers about when regulators required information. Ducker believed the regulators were encouraging insurers to start supplying information now, but agreed that the lack of certainty surrounding deadlines continued to be a problem.

“I think that the various regulators and [European] Commission have got to understand that the longer that certainty doesn’t exist, the harder it is for various companies to comply, [and] the more that some will wait until there is certainty before moving.” He said he thought this would be a big mistake, “and certainly not what is encouraged”.

Too much time

QBE’s head of enterprise management, Justin Skinner, felt that insurers were at risk of doing a “slight disservice” to regulators, however. He argued that a lot of the information, necessary to meet the requirements, was already in place. He believed it was unnecessary to wait until the remaining information had been confirmed.

“I think there is a lot of information out there, and waiting for level three implemented measures, which is the only bit outstanding now, is extremely short-sighted. You’ll get most of the way there now, based on what’s actually out there.”

Meanwhile, Barbican Insurance’s head of risk and governance, David Russell, believed there was a risk that insurers had “too much time” to prepare rather than too little. “The danger is that, given three years, we’re all going to spend three years doing stuff, when in actual fact, if you had maybe just one year and had to do it, you’d do a sensible job.

“I’m concerned that the three years means that we’re all going to be slightly anxious about whether we’ve done it well enough, and keep on adding complexity and embellishments to the end result, when it would be much better to say ‘do it quickly, do a sensible job, and then just move on’,” he explained.

Allianz Global Corporate & Specialty’s chief executive, Andreas Berger, also agreed there was a risk that the process of preparing for Solvency II could become over-engineered and that, with a structured project approach, clear deadlines and milestones, documentation and data could be ready for the regulator by the last quarter of this year.

Co-ordination is key

Ducker pointed out that pressing cultural issues, as well as organisation strategies, would need to be addressed in that period. “The actuarial staff, the risk management staff, some of the IT and ops people – it’s the much larger number of people that need to change a little bit.”

He believed that this transformation would need to include “underwriters in their day-to-day practices”, especially in some of these markets where they have very long-established practices. “We saw how difficult it was to get some of the contract certainty changes done to the market not long ago,” he added.

Zurich’s Solvency II expert, Jerome Berset, said that strong co-operation and co-ordination among supervisors would be a key factor to success. He also felt it was necessary that the industry had sufficient transition time to implement the new measures, ensuring that the effect of Solvency II would be “smooth”, with little disruption to the market and product lines.

Business development manager at SAS, Gez Llanaj, believed that time would remain a factor for many insurers. “Some people may think that 12 months is more appropriate. That depends totally on the organisation.”

Stop tweaking

“However, overall, time is very short,” Llanaj added. “It has been neglected in terms of having to grasp the complexities and the type of operation needed for Solvency II compliance.”

Unum’s head of audit, David Butler, pointed out that the new requirements meant companies would need to review their data repositories and stop the common practice of tweaking their own operational data.

“We’re going to have to make sure that people are using more consistent data throughout the organisation, and not creating their own cottage industries,” he said. He added that driving such cultural challenges represented the biggest obstacle ahead for the sector.

Russell suggested the standard for Solvency II remained ill-defined for insurers. He believed that it was ultimately insurers that would determine what shape success would take. “I’m pretty sure the regulator doesn’t actually know what success is, either,” he said.

“The pragmatic approach from the regulator is to say, okay, we’ll look across the market, and there’ll be averages: better than average, worse than average. Really, success is what we make it. The standard will be what the market determines the standard to be. If we’re not reasonably pragmatic at the beginning – if we set the bar far too high – then we’re just layering on a potential for costs and additional sophistication,” he said.

‘Ceiops has missed a trick’

Chairman of the internal model expert group of the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops), Paolo Cadoni, pointed out that insurers have questioned the technical analysis of the organisation’s calibration (measurements). He added that insurers had options when it came to deciding between internal and partial models. “If the standard format does not fit the firm’s risk profile, the firm has a choice,” he said. “When it comes to capital requirement, there is a wide spectrum of choices that firms can use.”

QBE’s Skinner, though, remained unconvinced. He argued that Ceiops’ approach was still too prescriptive. “I think Ceiops has made a fundamental mistake in trying to get a standard form that fits anyone. It will never work. I’ve been in this industry for a long time. I’ve been using capital models for a long, long time,” he said.

“ I think Ceiops has missed a big trick. They have a principles-based regime, and then they give you a firm stick, and say, ‘right, if you don’t get into that model, this is the number’.”

Understand the risk

The ABI’s assistant director, financial regulation and taxation, Paul Barrett, said that there was room for more flexibility for smaller companies in the Solvency II system. “We have to make the system work for the 20,000 insurance companies, not just the 200 biggest ones, so it is about finding some way through for those companies,” he said.

However, Skinner pointed out that the vast majority of the proposals of Solvency II would be good for the industry. “If you are a complex company, you should understand the risk and should be going down the internal model route already. It’s the grown-up way of running an insurance company,” he said. “That’s a great thing to tell your board. Solvency II is about how you should be running your insurance company rather than how, maybe, you were incorrectly running it in the past.” IT