Solvency II – State of play

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The preparations for Solvency II have required substantial investment of time, resources and money and there is no end in sight. …

The preparations for Solvency II have required substantial investment of time, resources and money and there is no end in sight.

But what do insurers really think of Solvency II? Will all the effort, the frustrations and the headaches be worth it once the regime is in place? Will the benefits ultimately outweigh the costs and will the end justify the means?

In order to discover the answers to these questions, we undertook a survey of senior executives in the non-life insurance sector during September and October 2012. We asked them how prepared they are for the brave new world of Solvency II, what areas they still need to focus on, and how they view the new regime after so many years of effort.

Their answers make for fascinating reading.

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  • 1. Solvency II – State of playA survey of the non-life insurance sector
  • 2. Contents Contents 03 Introduction 04 Headline findings 05 State of play 09 Detailed findings 09 Composition of respondents 11 Preparing for Solvency II 19 Going live 21 Concluding remarks 22 Contacts2 SOLVENCY II – STATE OF PLAY
  • 3. IntroductionSolvency II has already been dominating theagendas of non-life insurers for a numberof years. And, with the recent delays toimplementation, it looks certain to continueto demand their attention for several more.The preparations for the new regime have required substantialinvestment of time, resources and money and there is no endin sight. But what do insurers really think of Solvency II?Will all the effort, the frustrations and the headaches be worthit once the regime is in place? Will the benefits ultimatelyoutweigh the costs and will the end justify the means? In order to discover the answers to these questions, weundertook a survey of senior executives in the non-lifeinsurance sector during September and October 2012. Weasked them how prepared they are for the brave new worldof Solvency II, what areas they still need to focus on, andhow they view the new regime after so many years of effort.Their answers make for fascinating reading. It is more than three years since our last Solvency IIsurvey. At that time, preparations for the regime werein their infancy and little guidance had been issued. Thecontrast between the responses we received then and now isextremely interesting. We received responses to our latest survey from the UK,Ireland, Continental Europe and Bermuda and from a rangeof different insurance entities. We are enormously gratefulto everyone who took the time to complete the survey – itis self-evident, but nonetheless true, that without you, thisreport would not exist. Regardless of whether or not you responded to thesurvey, we hope that you will find the results as interestingand informative as we do.Simon SheafGeneral Insurance Practice LeaderT +44 (0)20 7728 3280M +44 (0)7792 228065E simon.h.sheaf@uk.gt.com SOLVENCY II – STATE OF PLAY 3
  • 4. Headline findings • Only one in four participants believes that Solvency II is the most appropriate way to run their business. • There is a feeling that the Directive’s good principles have been ruined by the proportion of complexity of its implementation. • Since our 2009 survey, there have been increases of 425% in the proportion of respondents who believe that Solvency II is a box ticking exercise and 300% in the proportion of respondents who believe that Solvency II is more red tape from Brussels. • As expected, insurance companies are further behind in their preparations than their peers in the Lloyd’s market. • Almost one in ten Lloyd’s managing agents believes that the calculation of the standard formula is not relevant for them. • There is a small minority of insurance companies who believe that transferring Solvency II from project basis to business as usual is not relevant for them. • The most significant constraints for the insurance market in implementing Solvency II are the lack of clarification of the regime’s requirements and the lack of resources. • Even at this relatively late stage, more than half of respondents reported that they were constrained by a lack of understanding and more than a third were constrained by a lack of board engagement. • The vast majority of participants believe that they will be ready (if necessary) by 1 January 2014. However, only 37% believe that 70% or more of the insurance market will also be ready by this date. • One third of insurance companies and Lloyd’s managing agents have not yet considered IFRS4 at all.4 SOLVENCY II – STATE OF PLAY
  • 5. State of playOur goal was to gather a The insurance industry does not seem date of Solvency II has been postponed to accept the necessity for Solvency several times, creating uncertaintyrepresentative sample of II as currently formulated, since only around the actual implementationnon-life insurers in order one in four participants believes that date and reluctance in some parts ofto be able to extrapolate it is the most appropriate way to run the insurance market to commit time, their business. What is clear is that money and resources.the survey’s results to the the industry appears to have become The negativity of the market iswhole insurance industry. more doubtful about Solvency II over also supported by the fact that inThe analysis of the the last few years since, in our 2009 the last three years there has been survey, over half of all respondents an increase of more than 400% inresponses revealed some believed that Solvency II was the most the proportion of respondents whointeresting facts about appropriate way to run their business. believe that Solvency II is a box tickingthe industry’s perceptions The reasons for this scepticism are exercise and an increase of 300% inregarding Solvency II. reflected in the survey. Whilst Solvency the proportion of respondents who II has the potential to add value to the believe that Solvency II is more red business, as its principles are perceived tape from Brussels. This overall view is positively by the market, this potential reinforced when we take into account is ruined by the complexity of its the responses of people more closely implementation. It is safe to say that involved in implementing Solvency the insurance market believes that the II; actuaries and risk professionals. European Insurance and Occupational Almost half of actuaries and risk Pensions Authority’s (EIOPA) professionals consider Solvency II to approach has been too complicated and be a box ticking exercise, while 60% of this has had a negative impact on the actuaries and 20% of risk professionals market’s perceptions about Solvency consider Solvency II as more red tape II. Furthermore, the implementation from Brussels. These percentages SOLVENCY II – STATE OF PLAY 5
  • 6. clearly demonstrate a shift in the and support. However, although the believe that this is not relevant formarket’s perception since, in 2009, the level of preparedness is different, it is them. This may be explained by thecorresponding percentages were all evident from the responses that both fact that some insurance companieszero. The implementation process, the insurance companies and Lloyd’s are not yet fully aware of Solvency IIconstant delays, the complexity of the managing agents have exactly the same requirements, since they still need toregime and the quantity of man hours priorities on their agendas for the make progress in various Solvency IIthat have been expended preparing for coming months and this is in line with elements, as illustrated in detail in theSolvency II, have all resulted in a loss our experience of talking to people in main body of the survey. This could beof the market’s hearts and minds. This the market. a signal to regulators to devote moreshould be of concern to regulators An interesting observation is that attention to small and medium insurersand supporters of Solvency II who one in ten Lloyd’s managing agents by providing further assistance andwill need to promote the benefits believes that the calculation of the support to ensure these companies willof the new regime effectively and standard formula is not relevant for keep up with the pace and will be fullypersuade the market of its usefulness them, despite the fact that regulators Solvency II compliant on time.in order to ensure buy-in from senior have the right to require an insurer In terms of the calculation of themanagement. to calculate its Solvency Capital regulatory capital requirements, Based on the responses that we Requirement (SCR) on the basis of Lloyd’s managing agents are obligedreceived, it is evident that insurance the standard formula even if it is using by the Corporation of Lloyd’s tocompanies are further behind in the an internal model, and therefore they use an internal model. However,preparations than their peers in the should be prepared for that eventuality. the same is not true for insuranceLloyd’s market. This is not a surprise Another noteworthy observation is companies and when we asked themin the light of the Corporation of that although transferring Solvency how they proposed to calculateLloyd’s efforts to drive the syndicates II from project basis to business as their requirements, the results werethrough the process, which included usual is very high in the agendas of enlightening and demonstrated athe imposition of strict deadlines, both Lloyd’s managing agents and shift in the market position. At theaccompanied by significant guidance insurance companies, 3% of the latter time of our 2009 survey, 34% of the6 SOLVENCY II – STATE OF PLAY
  • 7. insurance company participants had process, the onerous documentationchosen to use an internal model for the and validation requirements and thecalculation of their SCR, 8% a partial shortage of experienced resources. Thisinternal model, and none had chosen finding accords with our experience ofthe standard formula, while 58% the market.were undecided. These percentages Interestingly, the most significanthave changed in 2012 with 39% of constraint identified by participants inthe insurance company participants implementing Solvency II is the lackchoosing to use an internal model, of certainty around the requirements.14% a partial internal model and 47% This implies that, despite thechoosing either the standard formula or voluminous information produced bythe standard formula with Undertaking EIOPA and the regulators, SolvencySpecific Parameters (USPs). This may II requirements are still not clear. As asuggest that the vast majority of the result, companies are concerned aboutcompanies that were undecided in investing too much time before the2009 ended up selecting the standard final details have been clarified in caseformula. An analysis of the responses some of that time turns out to haveindicates that many small to medium been wasted in the light of informationinsurance companies have been put that subsequently emerges. This isoff the development of an internal perhaps understandable given themodel by the complicated and time recent delays and the potential thatconsuming internal model approval they could lead to previously resolved SOLVENCY II – STATE OF PLAY 7
  • 8. issues being reopened. Nevertheless, compliant by 1 January 2014, with have a material impact on insurers’we would caution firms against 81% of insurance companies and 94% reporting structure. Despite this,delaying for too long while awaiting of Lloyd’s managing agents saying that more than a third of the market hasfurther clarification. There is still a they would be, they are less confident not considered it at all. Although itsignificant amount of work to do and of their peers’ progress with only is understandable that participantsit is imperative that firms begin to 37% believing that 70% or more of are currently focusing on Solvencytackle it as soon as possible. Although the insurance market will be ready II, it is important that insurers dosome minor details of the new regime by 1 January 2014, and 25% thinking not underestimate the challenges andare expected to change between now that less than 50% of the market will the complexity IFRS 4 will bring andand the final implementation date, the be ready. This divergence of opinion ensure they leave sufficient time andstructure as currently envisaged will could indicate either overconfidence resources for them to be addressed.not change substantially. in respondents’ own readiness or an This issue is exacerbated by the Of some concern is that, even at unjustified pessimism about that of fact that IFRS 4 will, like Solvencythis stage, 55% of respondents cited a their competitors. II, require substantial changes tolack of understanding as a constraint A final interesting insight that the IT systems. In our view it will beand 35% were constrained by a lack of responses revealed is the market’s significantly more efficient to buildboard engagement. limited awareness about IFRS 4 Phase the requirements of both regimes into A further finding is that, although 2. Since IFRS 4 Phase 2 is going to a single project rather than runningthe participants are confident in their change the way insurers are accounting separate sequential projects.own ability to be fully Solvency II for their insurance contracts, it will8 SOLVENCY II – STATE OF PLAY
  • 9. Detailed findingsComposition of respondentsType of companies Fig 1: Type of companyOur survey was focused on the non-life insurance sector. Of those whocompleted the survey, 50% werefrom insurance companies (includingcomposites and reinsurers) whilst 45%were Lloyd’s managing agents (Fig. 1). Lloyd’s managing agency 45% Insurance company 50%Role within organisation Other 5%The survey was sent to a wide selectionof senior executives in the insurancesector. Responses were received fromindividuals in a variety of roles. More than a third of the returnedsurveys (39%) were completedby executives in risk managementdepartments, while 23% were returnedby actuaries (Fig. 2). 11% of the Fig 2: What is your role within your organisation?responses came from finance directorsand 7% came from personnel whowere dedicated to implementing CEO 2%and complying with the Solvency IIdirective (ie Solvency II project teams). FD 11%2% of the responses came from CEOs, Actuary 23%while the remaining 18% were returned Risk 39%by executives in a variety of different Solvency II 7%functions including compliance, claims Other 18%and internal audit. SOLVENCY II – STATE OF PLAY 9
  • 10. Annual premium income Fig 3: Annual Premium IncomeAnnual premium income of thecompanies that participated in thesurvey ranged from less than £20mto more than £1bn. We have split theparticipants into three groups; smallfirms (less than £100m), medium firms(between £100m and £500m) and largefirms (more than £500m). On this basis11% of the participants came fromsmall firms, 43% medium firms and46% large firms (Fig. 3). A closer look at the responsesreveals that 67% of the small firms Small 11% Insurance company 67%are insurance companies and 33% are Lloyds 33%Lloyd’s managing agents (Fig. 3). Thecomposition of the medium firms is Medium 43% Insurance company 42%different, with 42% being insurance Lloyds 58%companies and 58% being Lloyd’smanaging agents. As for the large firms, Large 46% Insurance company 53%53% of them are insurance companies Lloyds 47%and 47% Lloyd’s managing agents.Gross technical provisions Fig 4: Gross Technical ProvisionsThe gross technical provisions of thecompanies that participated in thesurvey ranged from less than £50mto more than £3bn. We have split theparticipants into three groups; smallfirms (less than £250m), medium firms(between £250m and £1bn) and largefirms (more than £1bn). On this basis,33% of the participants came fromsmall firms, 28% medium firms and39% large firms (Fig. 4). 56% of the small firms areinsurance companies and 44% are Small 33% Insurance company 56%Lloyd’s managing agents (Fig. 4). The Lloyds 44%composition of the medium firms isdifferent, with 29% being insurance Medium 28% Insurance company 29%companies and 71% Lloyd’s managing Lloyds 71%agents. As for the large firms, 67% areinsurance companies and 33% Lloyd’s Large 39% Insurance company 67%managing agents. Lloyds 33%10 SOLVENCY II – STATE OF PLAY
  • 11. Preparing for Solvency IIFig 5a: Overall, what is your impression of Solvency II?Clearly the most appropriate 52% way to run our business going forward 24% 30% A necessary evil 27% 4% A box ticking exercise 21% 2009 7%More red tape from Brussels 2012 28% 0% 10% 20% 30% 40% 50% 60%Impressions of Solvency II the remaining options has increasedGenerally speaking, the insurance significantly. 21% believe that Solvencyindustry does not appear to accept the II is ‘a box ticking exercise’ (theneed for Solvency II, with only 24% corresponding percentage in 2009 wasagreeing that the Solvency II regime only 4%) and 28% believe that it isis ‘clearly the most appropriate way ‘more red tape from Brussels’ (in 2009to run our business going forward’ only 7% believed this was the case).(Fig. 5a). Interestingly, the insurance All in all, the industry appearsindustry appears to have become to have become more cynical aboutmore doubtful about Solvency II Solvency II over the last three years.over the past three years. This can bedemonstrated by the fact that in 2009,over half of all respondents agreedthat Solvency II regime was ‘clearlythe most appropriate way to run ourbusiness going forward’. 27% of the respondents believedthat ‘Solvency II is a necessary evil’;a similar percentage (30%) expressedthis opinion in our 2009 survey. Aninteresting observation is that thepercentage of respondents that chose SOLVENCY II – STATE OF PLAY 11
  • 12. There does seem to be some Fig 5b: More red tape from Brusselssuggestion that the attitude towardsSolvency II varies according to role. 60% 2009It is interesting to note that 60% of 60%actuarial professionals, but only 20% 50% 2012of risk executives, believe that SolvencyII is ‘more red tape from Brussels’, 40%while the corresponding percentages 30%that believe that Solvency II is ‘a boxticking exercise’ are both 47% (Fig. 20%5b and Fig. 5c). In 2009, all of these 20%percentages were zero. Consequently, 10%it is safe to conclude that actuaries 0% 0%and risk professionals have become 0% Actuary Riskmore sceptical about the usefulness ofSolvency II over the past three years. This increasing scepticism issupported by the fact that only 21%of CEOs and finance directors believe Fig 5c: A box ticking exercisethat ‘the Solvency II regime is clearlythe most appropriate way to run their 50% 2009business going forward’ (in 2009 the 47% 47%percentage was almost double, standing 2012 40%at 40%) (Fig. 5d). Risk executivesalso demonstrated a sharp fall in their 30%support, since the percentage whobelieve that ‘the Solvency II regime is 20%clearly the most appropriate way torun our business going forward’ has 10%reduced by nearly a third within threeyears, from 75% in 2009 to 53% in 0% 0%2012. This accords with our experience 0% Actuary Riskof talking to people in the market.We have encountered a number ofcompanies where the implementers andthe Board are convinced that they willnot run the business based on Solvency Fig 5d: Clearly the most appropriate way to run our business goingII, but based on internally developed forwardmetrics that will be more appropriate 80%for them. 2009 70% 75% 2012 60% 50% 53% 40% 40% 30% 20% 21% 10% 0% CFO/FD Risk12 SOLVENCY II – STATE OF PLAY
  • 13. Fig 6a: Please rate the following statements: Once implemented, Solvency II 9% 53% 26% 12% will be worth the effort Solvency II is using up resources that would be better deployed in other areas 45% 29% 25% Solvency II preparations are distracting senior management from running the business 29% 36% 35% The principles of Solvency II have been 41% 41% 18% ruined by the implementation The principles of 42% 57% 1% Solvency II are good 0% 20% 40% 60% 80% 100% Strongly agree Agree Disagree Strongly disagreeThe majority of the participants (74%) corresponding percentage in 2009 was survey results, it is safe to say that thebelieve that ‘Solvency II is using only 30%. In addition, 82% believe insurance market believes that EIOPA’sup resources that would be better that ‘the principles of Solvency II have approach to Solvency II has been toodeployed in other areas’ and a not been ruined by the implementation’. complicated and this has had a negativemuch lower percentage (65%) believe This indicates that although the impact on the market’s perceptionthat ‘Solvency II preparations are majority believe that Solvency II about Solvency II and its merits.distracting senior management from has the potential to add value to therunning the business’ (Fig. 6a). These business, since its principles are sound,answers imply that Solvency II is they take the view that this potentialviewed more as a burden and, as such, has been ruined by the complexityit is not currently adding value to the of the implementation. Based on thebusiness. This conclusion confirms thenegative impression that the insurancemarket currently has of Solvency Fig 6b: As currently envisaged, Solvency II is too complicatedII, as reflected earlier. However, themarket has a positive attitude towards 100%the potential benefits that Solvency 70% 11%II could have on the business, since 89%almost two thirds of the participants 80%(62%) agreed with the statement that‘once implemented Solvency II will be 60%worth the effort’ (Fig. 6a). Although almost the whole market 40%(99%) believes that ‘Solvency IIprinciples are good’, 89% believe 30% 20%that ‘as currently envisaged, SolvencyII is too complicated’ (Fig. 6b). The 0% 2009 2012 Agree Disagree SOLVENCY II – STATE OF PLAY 13
  • 14. Fig 7a: For each of the following elements of Solvency II, please rate your preparations (Lloyd’s): 3%100% 9% 16% 23% 23% 39% 13% Not relevant 3% 31% 53% 84% Not started80% 32% 61% Significantly behind Slightly behind60% 10% 56% On track 52% 16% Ahead40% 13% Complete 29%20% 19% 13% 0% 3% Calculation Demonstrating Stress and Reporting and Transferring Risk of standard use/embedding scenario disclosure to business appetite formula testing requirements as usual (Pillar III)Fig 7b: For each of the following elements of Solvency II, please rate your preparations (Insurance Companies): 3% 3% 3% 3%100% 3% 5% 5% 9% 27% 8% 6% 27% Not relevant 11% 31% 33% 22% Not started80% 54% Significantly behind 43% 43% 62% Slightly behind60% 51% 58% On track40% Ahead 3% Complete 27% 19% 8%20% 16% 6% 8% 3% 0% Calculation of Demonstrating Stress and Reporting and Transferring Risk standard formula use/embedding scenario disclosure to business appetite testing requirements as usual (Pillar III)Implementation progress managing agents (more than 80%) Based on the responses thatAs expected, Lloyd’s managing agents have completed (or are ahead of plan/ we received, it is evident that theare generally better prepared for on track with) a significant number of preparations of insurance companiesSolvency II than insurance companies. Solvency II requirements. However, lag behind their peers in the Lloyd’s The vast majority of Lloyd’s almost one in four (23%) of the market. Apart from developing stressmanaging agents and insurance Lloyd’s respondents are slightly behind and scenario tests and transferring tocompanies (87% and 84% respectively) plan on developing stress tests and business as usual, which were describedhave completed (or are ahead of plan/ transferring Solvency II from a project earlier, insurance companies haveon track with) the calculation of the basis to business as usual (Fig. 7a). further to go in various Solvency IIstandard formula (Fig. 7a and Fig. 7b). Perhaps unsurprisingly, insurance elements such as demonstrating the useHowever, it is interesting that 9% of companies are even further behind and embedding of internal model (40%Lloyd’s managing agents (almost one in these two areas, with 30% of the behind plan), reporting and disclosurein ten) believe that the calculation of respondents significantly behind/ (35%) and risk appetite (32%). Thisthe standard formula is not relevant slightly behind on developing is not unexpected in the light of thefor them, despite the fact that the stress and scenario tests and 39% Corporation of Lloyd’s effort to driveregulator has the right to request an significantly behind/slightly behind on the syndicates through the process,insurer to calculate its Solvency Capital transferring to business as usual. which included the imposition of strictRequirement (SCR) on the basis of the It is interesting and a little worrying deadlines, accompanied by significantstandard formula, even if it is using an that 3% of insurers believe that guidance and support. However, itinternal model [Solvency II Directive, transferring Solvency II from a project does demonstrate the success ofArticle 112 (7) and Article 129(3)]. basis to business as usual is not relevant those efforts. The vast majority of Lloyd’s for them.14 SOLVENCY II – STATE OF PLAY
  • 15. Standard formula v internal model companies’ responses, where the A closer look at the resultsIn order to calculate their SCR, picture was rather different. 39% demonstrates a correlation betweenSolvency II gives firms a choice of respondents have chosen to use a the size of the insurance company andbetween using the standard formula full internal model, 33% to use the the method selected for calculatingand using an approved internal model. unadjusted standard formula, with the SCR (Fig. 8b). Two thirds of theThe standard formula will be simpler the remaining 28% equally divided small insurance companies, and almostto use. However, the internal model between developing a partial internal half of the medium companies, haveis likely to be better tailored to an model and using the standard formula chosen to use the standard formulaindividual company’s risk profile. with Undertaking Specific Parameters for calculating their SCR. On theDeveloping an internal model has (USPs) (Fig. 8a). It is interesting to other hand, only 17% of the largefar reaching benefits in terms of compare these results with those of the insurance companies will calculatequantifying the risks underlying the 2009 survey. In 2009, 42% of insurance their SCR using the standard formula,business and using this information to companies responding had chosen to while a substantial 39% will use amake better decisions. use an internal model (either a full or full internal model. It is clear from The survey asked companies a partial one), with the remaining 58% our discussions with the market thatwhether they intended to use an being undecided (Fig. 8a). At this stage, many small to medium insuranceinternal model or the standard no respondents had decided to use the companies have been put off theformula for calculating their SCR. standard formula. This comparison development of an internal model byAmongst Lloyd’s entities, 100% of suggests that the majority of those the complicated and time consumingthe respondents will use a full internal who were undecided in 2009 may internal model approval process, themodel. This is unsurprising as Lloyd’s have now chosen to use the standard onerous documentation and validationrequires managing agents to do so. formula (either with or without USPs) requirements and the shortage of What has proven more interesting for calculating their regulatory capital experienced resources.is the analysis of the insurance requirements under Solvency II.Fig 8a: How are you intending to calculate your regulatory capital requirements under Solvency II? (Insurance Companies) 34% Full internal model 39% 8%Partial internal model 14% 0% Standard formula 14% with USPs 2009 0% Standard formula 2012 33% 0% 5% 10% 15% 20% 25% 30% 35% 40%Fig 8b: How are you intending to calculate your regulatory capital requirements under Solvency II? (Insurance Companies) Large 17% 17% 28% 39% Standard formula Standard formula with USPs 46% 15% 38% Partial internal modelMedium Full internal model Small 67% 17% 17% 0% 20% 40% 60% 80% 100% SOLVENCY II – STATE OF PLAY 15
  • 16. Fig 9a: Where will you be focusing your efforts over the next six to twelve months? (Insurance Companies) 3%100% 19% 21% 33% 15% 9% 22% 80% 39% 45% 56% No effort 58% 47% 60% A little effort 40% Moderate effort 42% 36% Significant effort 20% 24% 22% 9% 0% Demonstrating ORSA Stress and Reporting and Transferring use/embedding scenario testing disclosure to business requirements as usual (Pillar III)Fig 9b: Where will you be focusing your efforts over the next six to twelve months? (Lloyd’s) 3%100% 7% 10% 28% 28% 10% 38% 45% 45% 80% No effort 52% 62% 60% A little effort 52% 48% 40% Moderate effort 41% Significant effort 20% 21% 10% 0% Demonstrating ORSA Stress and Reporting Transferring use/embedding scenario testing and disclosure to business requirements as usual (Pillar III)Future focus business as usual’ (69% and 86%). WellNext, the survey asked firms where over half of the market is also planningthey will be focusing their efforts over to allocate time to the ‘ORSA’ andthe next six to twelve months. The ‘Stress and scenario testing’ in the nextresponses that we received revealed twelve months.that insurance companies and Lloyd’s The replies to this question aremanaging agents have exactly the consistent with the responses tosame priorities on their agendas. the question about the market’sThe most popular answer for both preparedness regarding variousgroups was ‘Reporting and disclosure Solvency II elements (as discussedrequirements (Pillar III)’, with 81% earlier) and they are in line with ourand 93% respectively putting either experience of talking to people in thesignificant or moderate effort into this market. We have encountered a numberaspect of Solvency II (Fig. 9a and Fig. of companies who are stressing the fact9b). The next most popular answer was that there is still a substantial amount‘Demonstrating use/embedding’ (81% of work to be done in many areasand 90%), followed by ‘Transferring before they fully operate on a SolvencySolvency II from project basis to II basis.16 SOLVENCY II – STATE OF PLAY
  • 17. Constraints A closer look at the responses thatWe asked respondents about their we received reveals that althoughmain constraints in preparing for the Lloyd’s managing agents are, asnew regime. The most significant ones expected, generally more prepared foridentified in our survey are that firms Solvency II than insurance companies,are awaiting further clarification as to they still have many constraints. 91%what Solvency II will require (given as need further clarification regardinga constraint by 91% of respondents), Solvency II requirement, 84% do notthat they lack the necessary resources have adequate resources, while 75%(85%) and that they have data issues have data issues and 65% consider the(78%) (Fig. 10a). A relatively high uncertainty over implementation datepercentage of the respondents (75%) to be a constraint (Fig. 10b).also considers the uncertainty aroundthe actual Solvency II implementationdate to be a constraint. Of someconcern is that, even at this stage,55% of respondents cited a lackof understanding, and 35% wereconstrained by the lack of engagementat boardroom level.Fig 10a: What are the main constraints in your Solvency II preparations? 2% 4% 2%100% 9% 64% 44% 15% 22% 21% 48% 41% 80% 62% Not relevant 48% 60% No constraint 50% 44% Slight constraint 40% 43% 30% Significant constraint 27% 20% 16% 5% 5% 0% Lack of board Lack of Uncertainty over Lack of Shortage of Data issues engagement clarification of implementation understanding resources Solvency II date requirementsFig 10b: What are the main constraints in your Solvency II preparations? (Lloyd’s) 3% 3%100% 9% 77% 52% 16% 25% 32% 50% 31%80% 59% Not relevant 55%60% No constraint 53% 42% Slight constraint40% 41% Significant constraint20% 20% 16% 10% 0% 3% 3% Lack of board Lack of Uncertainty over Lack of Shortage of Data issues engagement clarification of implementation understanding resources Solvency II date requirements SOLVENCY II – STATE OF PLAY 17
  • 18. Fig 10c: What are the main constraints in your Solvency II preparations? (Insurance Companies) 3%100% 5% 5% 12% 11% 22% 54% 11% 47% 81% 51% 43%80% 62% Not relevant60% No constraint 47% Slight constraint40% 38% 41% 38% Significant constraint20% 16% 5% 8% 0% Lack of board Lack of Uncertainty over Lack of Shortage of Data issues engagement clarification implementation understanding resources of Solvency II date requirements Similar trends are observed amongst process and are aware of what needs the recent delays and the potential thatinsurance companies where 94% need doing. However, they fear that they they will result in previously settledfurther clarification regarding Solvency may have insufficient resources to issues being reopened. Nevertheless,II requirements, 89% do not have action their plans and it appears that we would caution firms againstadequate resources, 84% consider the they still want further clarification as to delaying for too long while they awaituncertainty over implementation date what Solvency II will require, despite further clarification. There is still ato be a constraint and 78% have data the vast quantities of information significant amount of work to do andissues (Fig. 10c). issued by EIOPA and national it is imperative that firms begin to Based on the responses that we supervisors. As a result, they are tackle it as soon as possible. Althoughreceived, it is evident that both Lloyd’s concerned about investing too much some minor details of the new regimemanaging agents and insurance time before the final details have been are expected to change between nowcompanies have the same constraints in clarified, in case some of that time turns and the final implementation date, thetheir preparations. out to have been wasted in the light of structure as currently envisaged will This suggests that many companies information that subsequently emerges. not change substantially.are engaged with the Solvency II This is perhaps understandable givenIFRS 4 Phase 2 Fig 11: In your preparations for Solvency II, have you considered IFRS4 Phase 2?IFRS 4 Phase 2 is going to change theway insurance companies accountfor their insurance contracts and is Insurance companies Lloyd’slikely to be introduced a few yearsafter Solvency II. Since it will have amaterial impact on insurers’ reportingrequirements, we asked firms if they 34% 34%have considered it. The responses thatwe received are worrying, since 34% ofboth insurance companies and Lloyd’smanaging agents have not considered 66% 66%it at all (Fig. 11). Like Solvency II,IFRS 4 Phase 2 will require substantialchanges in IT systems. In our view, itwill be far more efficient to build therequirements of both systems into Yes Noone project rather than running twosequential projects that will result insignificant duplication of effort.18 SOLVENCY II – STATE OF PLAY
  • 19. Going liveImplementation date Fig 12: Do you think Solvency II will go live on 1 January 2014 or will it beWith impeccable timing, the survey delayed further?was launched just before the failureof the Omnibus II talks, but by thetime most respondents completed the It will go live onsurvey, it was clear that the talks had 1 January 2014 3%failed to reach a consensus and that It will be delayed bythe implementation date of the new less than one year 3%regime would have to be deferred. It will be delayed byConsequently it was not surprising one year 42%that 97% of respondents believed that It will be delayed bySolvency II will be delayed (Fig. 12). more than one year 51%Following the failure of the Omnibus It will never happen 3%II talks it quickly became apparentthat the delay to implementation wasgoing to be at least a year and, while42% of the participants believed thatthe delay would only be a single year,51% believed that ‘it will be delayed bymore than one year’ and an especiallypessimistic 3% believed that ‘it willnever happen’.Will you be ready? Fig 13: If your company is required to comply with Solvency II by 1 JanuaryThere are encouraging signs that 2014, will it be ready?companies are proceeding with theirpreparations for Solvency II. Even nowthat the implementation date has beenpostponed, only 3% of the insurance 94% 6% Lloydscompanies and none of the Lloyd’smanaging agents felt that, if required,they would definitely not be ready 3%to comply with the new regime by 1January 2014. Despite the ambiguityaround the implementation date, 94% Insurance 81% 16%of the Lloyd’s participants and 81% companyof insurance companies believe that, ifrequired, they will be fully Solvency 0% 20% 40% 60% 80% 100%II compliant by 1 January 2014. Only6% of Lloyd’s participants and 16% Yes No Not sureof insurance companies were not sure(Fig. 13). SOLVENCY II – STATE OF PLAY 19
  • 20. Will the market be ready? Fig 14: If companies are required to comply with Solvency II by 1 JanuaryHowever, there is less confidence about 2014, what percentage of the insurance market do you think will be ready?competitors’ preparations. The finalquestion of the survey was about the 100% 3%perception that the participants hadwith regards to the preparedness of 90%-100% 7%the insurance market as a whole. Based 70%-90% 27%on the responses that we received, it isclear that although the participants are 50%-70% 37%confident in their own readiness, theydo not share the same confidence for 30%-50% 15%their peers, since only 37% believe that 9% 10%-30%70% or more of the insurance marketwill be ready by 1 January 2014 if so <10% 1%required (Fig. 14). Exactly the same 0% 5% 10% 15% 20% 25% 30% 35% 40%percentage believe that between 50%and 70% of the market will be readyby then, and a substantial 25% of theparticipants believe that 50% or lesswill be ready by 1 January 2014. This divergence of opinion betweenrespondents’ views of their ownpreparations and those of their peerscould indicate either overconfidence intheir own readiness or an unjustifiedpessimism about that of theircompetitors.20 SOLVENCY II – STATE OF PLAY
  • 21. Concluding remarksOur survey has identified several have been expended in preparations and a significant amount of work to do andinteresting points relating to the the shortage of experienced resources. it is best that firms begin to tackle it aspreparedness of the non-life insurance It is interesting but regretful that the soon as possible. Although some minorsector for the Solvency II regime. In vast majority of the market believes details of the new regime are expectedparticular, it is clear that the negativity that sound principles in the Solvency II to change between now and the finaltowards the new regime has increased Directive have been undermined by the implementation date (whenever thatmarkedly over the last few years. complexity of the implementation. may be!), the structure as currentlyAlthough some negativity was evident in With this level of negativity envisaged will not change substantially.our 2009 survey, the level of scepticism and the latest significant delay to And if insurers lose momentum at thisappears to have grown substantially. This implementation, it would be all too easy stage, it is going to be far more difficulthas in part been caused by the constant for insurers to take the opportunity to and far more costly for them to pick updelays, the increasing complexity of the halt their preparations. However, we the pace later.regime, the quantity of man hours that would caution against this. There is still SOLVENCY II – STATE OF PLAY 21
  • 22. ContactsSimon Sheaf Stephen KellyGeneral Insurance Practice Leader Risk & Capital Management Practice LeaderT +44 (0)20 7728 3280 T +44 (0)20 7728 3073M +44 (0)7792 228065 M +44 (0)7976 963187E simon.h.sheaf@uk.gt.com E stephen.f.kelly@uk.gt.com22 SOLVENCY II – STATE OF PLAY
  • 23. SOLVENCY II – STATE OF PLAY 23
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