Solvency II QIS5 results benign, but underlying issues lurk: Willis Re

Results of Solvency II’s fifth quantitative impact study (QIS5) showed a smaller-than-expected increase in the number of companies failing to meet their solvency capital requirement.But the positive results may mask underlying issues, according to a Willis Re report. In its report, Beware the Dog that Didn’t Bark – Is the European Insurance Industry Really Ready for Solvency II?, Willis Re notes that on the whole, the European re/insurance industry seems to be “comfortably well-capitalized and in relatively good shape for the implementation of Solvency II in 2013.”But upon closer analysis, researchers found:• The number of insurers submitting internal model results was too small to draw general conclusions, but the results indicate internal models did not provide materially different outcomes from the standard formula. “Quite surprisingly, a significant number of insurers that have already applied for regulatory approval did not use their models in QIS5.”• Many participants felt a number of solvency capital requirement sub-modules (for example, the counterparty default risk sub-module) were disproportionately complex, which led to widespread use of simplifications.• The catastrophe risk sub-module received the most criticism of the sub-modules. Respondents complained about the complexity of data requirements and the limited sensitivity to actual risk exposure, creating a bit of a Catch-22, since the latter cannot be fixed without increasing the former. “Many companies, large as well as small, struggled with the complexity of QIS5,” said David Simmons, managing director of analytics and head of international risk management for Willis Re. “Some parts of the standard formula, in particular the catastrophe risk module, do work for many companies’ risk profiles. The answer may be internal capital models, but QIS5 shows that companies are making slow progress in this area.”It is also debateable whether national regulators have the resources to deal with the increasing number of internal model approval requests,” Simmons continued.