Solvency II – State of play

Solvency II – State of play
A survey of the non-life insurance sector

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 Contacts

2 SOLVENCY II – STATE OF PLAY

Introduction

Solvency II has already been dominating the
agendas of non-life insurers for a number
of years. And, with the recent delays to
implementation, it looks certain to continue
to demand their attention for several more.

The preparations for the new regime 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.
It is more than three years since our last Solvency II
survey. At that time, preparations for the regime were
in their infancy and little guidance had been issued. The
contrast between the responses we received then and now is
extremely interesting.
We received responses to our latest survey from the UK,
Ireland, Continental Europe and Bermuda and from a range
of different insurance entities. We are enormously grateful
to everyone who took the time to complete the survey – it
is self-evident, but nonetheless true, that without you, this
report would not exist.
Regardless of whether or not you responded to the
survey, we hope that you will find the results as interesting
and informative as we do.

Simon Sheaf
General Insurance Practice Leader
T +44 (0)20 7728 3280
M +44 (0)7792 228065
E simon.h.sheaf@uk.gt.com

SOLVENCY II – STATE OF PLAY 3

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.


State of play

Our 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 uncertainty
representative sample of II as currently formulated, since only around the actual implementation
non-life insurers in order one in four participants believes that date and reluctance in some parts of
to 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 is
whole insurance industry. more doubtful about Solvency II over also supported by the fact that in
The 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% in
responses revealed some
believed that Solvency II was the most the proportion of respondents who
interesting facts about appropriate way to run their business. believe that Solvency II is a box ticking
the industry’s perceptions The reasons for this scepticism are exercise and an increase of 300% in
regarding 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


clearly demonstrate a shift in the and support. However, although the believe that this is not relevant for
market’s perception since, in 2009, the level of preparedness is different, it is them. This may be explained by the
corresponding percentages were all evident from the responses that both fact that some insurance companies
zero. The implementation process, the insurance companies and Lloyd’s are not yet fully aware of Solvency II
constant delays, the complexity of the managing agents have exactly the same requirements, since they still need to
regime and the quantity of man hours priorities on their agendas for the make progress in various Solvency II
that have been expended preparing for coming months and this is in line with elements, as illustrated in detail in the
Solvency II, have all resulted in a loss our experience of talking to people in main body of the survey. This could be
of the market’s hearts and minds. This the market. a signal to regulators to devote more
should be of concern to regulators An interesting observation is that attention to small and medium insurers
and supporters of Solvency II who one in ten Lloyd’s managing agents by providing further assistance and
will need to promote the benefits believes that the calculation of the support to ensure these companies will
of the new regime effectively and standard formula is not relevant for keep up with the pace and will be fully
persuade 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 the
management. 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 obliged
received, it is evident that insurance the standard formula even if it is using by the Corporation of Lloyd’s to
companies 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 insurance
Lloyd’s market. This is not a surprise Another noteworthy observation is companies and when we asked them
in the light of the Corporation of that although transferring Solvency how they proposed to calculate
Lloyd’s efforts to drive the syndicates II from project basis to business as their requirements, the results were
through the process, which included usual is very high in the agendas of enlightening and demonstrated a
the imposition of strict deadlines, both Lloyd’s managing agents and shift in the market position. At the
accompanied by significant guidance insurance companies, 3% of the latter time of our 2009 survey, 34% of the


insurance company participants had process, the onerous documentation
chosen to use an internal model for the and validation requirements and the
calculation of their SCR, 8% a partial shortage of experienced resources. This
internal model, and none had chosen finding accords with our experience of
the standard formula, while 58% the market.
were undecided. These percentages Interestingly, the most significant
have changed in 2012 with 39% of constraint identified by participants in
the insurance company participants implementing Solvency II is the lack
choosing to use an internal model, of certainty around the requirements.
14% a partial internal model and 47% This implies that, despite the
choosing either the standard formula or voluminous information produced by
the standard formula with Undertaking EIOPA and the regulators, Solvency
Specific Parameters (USPs). This may II requirements are still not clear. As a
suggest that the vast majority of the result, companies are concerned about
companies that were undecided in investing too much time before the
2009 ended up selecting the standard final details have been clarified in case
formula. An analysis of the responses some of that time turns out to have
indicates that many small to medium been wasted in the light of information
insurance companies have been put that subsequently emerges. This is
off the development of an internal perhaps understandable given the
model by the complicated and time recent delays and the potential that
consuming internal model approval they could lead to previously resolved


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 has
further clarification. There is still a they would be, they are less confident not considered it at all. Although it
significant amount of work to do and of their peers’ progress with only is understandable that participants
it is imperative that firms begin to 37% believing that 70% or more of are currently focusing on Solvency
tackle it as soon as possible. Although the insurance market will be ready II, it is important that insurers do
some minor details of the new regime by 1 January 2014, and 25% thinking not underestimate the challenges and
are expected to change between now that less than 50% of the market will the complexity IFRS 4 will bring and
and the final implementation date, the be ready. This divergence of opinion ensure they leave sufficient time and
structure 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 Solvency
this stage, 55% of respondents cited a their competitors. II, require substantial changes to
lack of understanding as a constraint A final interesting insight that the IT systems. In our view it will be
and 35% were constrained by a lack of responses revealed is the market’s significantly more efficient to build
board 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 running
the 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 will


Detailed findings

Composition of respondents
Type of companies
Fig 1: Type of company
Our survey was focused on the non-
life insurance sector. Of those who
completed the survey, 50% were
from insurance companies (including
composites 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 selection
of senior executives in the insurance
sector. Responses were received from
individuals in a variety of roles.
More than a third of the returned
surveys (39%) were completed
by executives in risk management
departments, while 23% were returned
by actuaries (Fig. 2). 11% of the Fig 2: What is your role within your organisation?
responses came from finance directors
and 7% came from personnel who
were dedicated to implementing
CEO 2%
and complying with the Solvency II
directive (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.


Annual premium income
Fig 3: Annual Premium Income
Annual premium income of the
companies that participated in the
survey ranged from less than £20m
to more than £1bn. We have split the
participants into three groups; small
firms (less than £100m), medium firms
(between £100m and £500m) and large
firms (more than £500m). On this basis
11% of the participants came from
small firms, 43% medium firms and
46% large firms (Fig. 3).
A closer look at the responses
reveals 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). The
composition of the medium firms is Medium 43% Insurance company 42%
different, with 42% being insurance Lloyds 58%
companies and 58% being Lloyd’s
managing 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 Provisions
The gross technical provisions of the
companies that participated in the
survey ranged from less than £50m
to more than £3bn. We have split the
participants into three groups; small
firms (less than £250m), medium firms
(between £250m and £1bn) and large
firms (more than £1bn). On this basis,
33% of the participants came from
small firms, 28% medium firms and
39% large firms (Fig. 4).
56% of the small firms are
insurance companies and 44% are Small 33% Insurance company 56%
Lloyd’s managing agents (Fig. 4). The Lloyds 44%
composition of the medium firms is
different, with 29% being insurance Medium 28% Insurance company 29%
companies and 71% Lloyd’s managing Lloyds 71%
agents. As for the large firms, 67% are
insurance companies and 33% Lloyd’s Large 39% Insurance company 67%
managing agents. Lloyds 33%


Preparing for Solvency II

Fig 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 increased
Generally speaking, the insurance significantly. 21% believe that Solvency
industry does not appear to accept the II is ‘a box ticking exercise’ (the
need for Solvency II, with only 24% corresponding percentage in 2009 was
agreeing that the Solvency II regime only 4%) and 28% believe that it is
is ‘clearly the most appropriate way ‘more red tape from Brussels’ (in 2009
to run our business going forward’ only 7% believed this was the case).
(Fig. 5a). Interestingly, the insurance All in all, the industry appears
industry appears to have become to have become more cynical about
more doubtful about Solvency II Solvency II over the last three years.
over the past three years. This can be
demonstrated by the fact that in 2009,
over half of all respondents agreed
that Solvency II regime was ‘clearly
the most appropriate way to run our
business going forward’.
27% of the respondents believed
that ‘Solvency II is a necessary evil’;
a similar percentage (30%) expressed
this opinion in our 2009 survey. An
interesting observation is that the
percentage of respondents that chose


There does seem to be some
Fig 5b: More red tape from Brussels
suggestion that the attitude towards
Solvency II varies according to role. 60%
2009
It is interesting to note that 60% of 60%
actuarial professionals, but only 20% 50% 2012
of risk executives, believe that Solvency
II is ‘more red tape from Brussels’, 40%
while the corresponding percentages
30%
that believe that Solvency II is ‘a box
ticking 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 Risk
more sceptical about the usefulness of
Solvency II over the past three years.
This increasing scepticism is
supported by the fact that only 21%
of CEOs and finance directors believe Fig 5c: A box ticking exercise
that ‘the Solvency II regime is clearly
the most appropriate way to run their 50%
2009
business going forward’ (in 2009 the 47% 47%
percentage was almost double, standing 2012
40%
at 40%) (Fig. 5d). Risk executives
also demonstrated a sharp fall in their 30%
support, since the percentage who
believe that ‘the Solvency II regime is 20%
clearly the most appropriate way to
run our business going forward’ has
10%
reduced by nearly a third within three
years, from 75% in 2009 to 53% in 0% 0%
2012. This accords with our experience 0%
Actuary Risk
of talking to people in the market.
We have encountered a number of
companies where the implementers and
the Board are convinced that they will
not run the business based on Solvency Fig 5d: Clearly the most appropriate way to run our business going
II, but based on internally developed forward
metrics that will be more appropriate
80%
for them. 2009
70% 75%
2012
60%

50% 53%
40%
40%
30%

20%
21%
10%

0%
CFO/FD Risk


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 disagree

The majority of the participants (74%) corresponding percentage in 2009 was survey results, it is safe to say that the
believe that ‘Solvency II is using only 30%. In addition, 82% believe insurance market believes that EIOPA’s
up resources that would be better that ‘the principles of Solvency II have approach to Solvency II has been too
deployed in other areas’ and a not been ruined by the implementation’. complicated and this has had a negative
much lower percentage (65%) believe This indicates that although the impact on the market’s perception
that ‘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 the
running the business’ (Fig. 6a). These business, since its principles are sound,
answers imply that Solvency II is they take the view that this potential
viewed more as a burden and, as such, has been ruined by the complexity
it is not currently adding value to the of the implementation. Based on the
business. This conclusion confirms the
negative impression that the insurance
market currently has of Solvency
Fig 6b: As currently envisaged, Solvency II is too complicated
II, as reflected earlier. However, the
market 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 II
principles are good’, 89% believe 30%
20%
that ‘as currently envisaged, Solvency
II is too complicated’ (Fig. 6b). The 0%
2009 2012

Agree Disagree


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 started
80%
32% 61% Significantly behind
Slightly behind
60% 10%
56% On track
52%
16% Ahead
40%

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 started
80% 54%
Significantly behind
43% 43%
62% Slightly behind
60%
51% 58%
On track

40% 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 that
As expected, Lloyd’s managing agents have completed (or are ahead of plan/ we received, it is evident that the
are generally better prepared for on track with) a significant number of preparations of insurance companies
Solvency 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 stress
managing agents and insurance Lloyd’s respondents are slightly behind and scenario tests and transferring to
companies (87% and 84% respectively) plan on developing stress tests and business as usual, which were described
have completed (or are ahead of plan/ transferring Solvency II from a project earlier, insurance companies have
on track with) the calculation of the basis to business as usual (Fig. 7a). further to go in various Solvency II
standard formula (Fig. 7a and Fig. 7b). Perhaps unsurprisingly, insurance elements such as demonstrating the use
However, 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 disclosure
in ten) believe that the calculation of respondents significantly behind/ (35%) and risk appetite (32%). This
the standard formula is not relevant slightly behind on developing is not unexpected in the light of the
for them, despite the fact that the stress and scenario tests and 39% Corporation of Lloyd’s effort to drive
regulator 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 strict
Requirement (SCR) on the basis of the It is interesting and a little worrying deadlines, accompanied by significant
standard formula, even if it is using an that 3% of insurers believe that guidance and support. However, it
internal model [Solvency II Directive, transferring Solvency II from a project does demonstrate the success of
Article 112 (7) and Article 129(3)]. basis to business as usual is not relevant those efforts.
The vast majority of Lloyd’s for them.


Standard formula v internal model companies’ responses, where the A closer look at the results
In order to calculate their SCR, picture was rather different. 39% demonstrates a correlation between
Solvency II gives firms a choice of respondents have chosen to use a the size of the insurance company and
between using the standard formula full internal model, 33% to use the the method selected for calculating
and using an approved internal model. unadjusted standard formula, with the SCR (Fig. 8b). Two thirds of the
The standard formula will be simpler the remaining 28% equally divided small insurance companies, and almost
to use. However, the internal model between developing a partial internal half of the medium companies, have
is likely to be better tailored to an model and using the standard formula chosen to use the standard formula
individual company’s risk profile. with Undertaking Specific Parameters for calculating their SCR. On the
Developing an internal model has (USPs) (Fig. 8a). It is interesting to other hand, only 17% of the large
far reaching benefits in terms of compare these results with those of the insurance companies will calculate
quantifying 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 a
make 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 that
whether they intended to use an being undecided (Fig. 8a). At this stage, many small to medium insurance
internal model or the standard no respondents had decided to use the companies have been put off the
formula for calculating their SCR. standard formula. This comparison development of an internal model by
Amongst Lloyd’s entities, 100% of suggests that the majority of those the complicated and time consuming
the respondents will use a full internal who were undecided in 2009 may internal model approval process, the
model. This is unsurprising as Lloyd’s have now chosen to use the standard onerous documentation and validation
requires 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 model
Medium
Full internal model

Small 67% 17% 17%

0% 20% 40% 60% 80% 100%


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%). Well
Next, the survey asked firms where over half of the market is also planning
they will be focusing their efforts over to allocate time to the ‘ORSA’ and
the next six to twelve months. The ‘Stress and scenario testing’ in the next
responses that we received revealed twelve months.
that insurance companies and Lloyd’s The replies to this question are
managing agents have exactly the consistent with the responses to
same priorities on their agendas. the question about the market’s
The most popular answer for both preparedness regarding various
groups was ‘Reporting and disclosure Solvency II elements (as discussed
requirements (Pillar III)’, with 81% earlier) and they are in line with our
and 93% respectively putting either experience of talking to people in the
significant or moderate effort into this market. We have encountered a number
aspect of Solvency II (Fig. 9a and Fig. of companies who are stressing the fact
9b). The next most popular answer was that there is still a substantial amount
‘Demonstrating use/embedding’ (81% of work to be done in many areas
and 90%), followed by ‘Transferring before they fully operate on a Solvency
Solvency II from project basis to II basis.


Constraints A closer look at the responses that
We asked respondents about their we received reveals that although
main constraints in preparing for the Lloyd’s managing agents are, as
new regime. The most significant ones expected, generally more prepared for
identified 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 regarding
a constraint by 91% of respondents), Solvency II requirement, 84% do not
that 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 date
percentage of the respondents (75%) to be a constraint (Fig. 10b).
also considers the uncertainty around
the actual Solvency II implementation
date to be a constraint. Of some
concern is that, even at this stage,
55% of respondents cited a lack
of understanding, and 35% were
constrained by the lack of engagement
at 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
requirements

Fig 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%
40% 41%


20% 20%
16%
10%

0% 3% 3%
engagement clarification of implementation understanding resources
Solvency II date
requirements


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 relevant

60% No constraint

40% 38%
41%
38%

20%
16%

5% 8%
0%
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 that
insurance companies where 94% need doing. However, they fear that they they will result in previously settled
further 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 against
adequate resources, 84% consider the they still want further clarification as to delaying for too long while they await
uncertainty over implementation date what Solvency II will require, despite further clarification. There is still a
to be a constraint and 78% have data the vast quantities of information significant amount of work to do and
issues (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. Although
received, it is evident that both Lloyd’s concerned about investing too much some minor details of the new regime
managing agents and insurance time before the final details have been are expected to change between now
companies have the same constraints in clarified, in case some of that time turns and the final implementation date, the
their 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 given

IFRS 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 the
way insurance companies account
for their insurance contracts and is Insurance companies Lloyd’s
likely to be introduced a few years
after Solvency II. Since it will have a
material impact on insurers’ reporting
requirements, we asked firms if they 34% 34%
have considered it. The responses that
we received are worrying, since 34% of
both insurance companies and Lloyd’s
managing agents have not considered 66% 66%
it at all (Fig. 11). Like Solvency II,
IFRS 4 Phase 2 will require substantial
changes in IT systems. In our view, it
will be far more efficient to build the
requirements of both systems into Yes No
one project rather than running two
sequential projects that will result in
significant duplication of effort.


Going live

Implementation date
Fig 12: Do you think Solvency II will go live on 1 January 2014 or will it be
With impeccable timing, the survey
delayed further?
was launched just before the failure
of the Omnibus II talks, but by the
time most respondents completed the
It will go live on
survey, it was clear that the talks had 1 January 2014 3%
failed to reach a consensus and that
It will be delayed by
the implementation date of the new less than one year 3%
regime would have to be deferred.
It will be delayed by
Consequently it was not surprising one year 42%
that 97% of respondents believed that It will be delayed by
Solvency 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 apparent
that the delay to implementation was
going to be at least a year and, while
42% of the participants believed that
the delay would only be a single year,
51% believed that ‘it will be delayed by
more than one year’ and an especially
pessimistic 3% believed that ‘it will
never happen’.

Will you be ready?
Fig 13: If your company is required to comply with Solvency II by 1 January
There are encouraging signs that 2014, will it be ready?
companies are proceeding with their
preparations for Solvency II. Even now
that the implementation date has been
postponed, only 3% of the insurance 94% 6%
Lloyd's
companies and none of the Lloyd’s
managing agents felt that, if required,
they would definitely not be ready
3%
to comply with the new regime by 1
January 2014. Despite the ambiguity
around the implementation date, 94% Insurance 81% 16%

of the Lloyd’s participants and 81% company

of insurance companies believe that, if
required, they will be fully Solvency 0% 20% 40% 60% 80% 100%
II compliant by 1 January 2014. Only
6% of Lloyd’s participants and 16%
Yes No Not sure
of insurance companies were not sure
(Fig. 13).


Will the market be ready?
Fig 14: If companies are required to comply with Solvency II by 1 January
However, there is less confidence about
2014, what percentage of the insurance market do you think will be ready?
competitors’ preparations. The final
question of the survey was about the
100% 3%
perception that the participants had
with 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 is
clear that although the participants are 50%-70% 37%
confident in their own readiness, they
do 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 market
will 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 ready
by then, and a substantial 25% of the
participants believe that 50% or less
will be ready by 1 January 2014.
This divergence of opinion between
respondents’ views of their own
preparations and those of their peers
could indicate either overconfidence in
their own readiness or an unjustified
pessimism about that of their
competitors.


Concluding remarks

Our survey has identified several have been expended in preparations and a significant amount of work to do and
interesting points relating to the the shortage of experienced resources. it is best that firms begin to tackle it as
preparedness of the non-life insurance It is interesting but regretful that the soon as possible. Although some minor
sector for the Solvency II regime. In vast majority of the market believes details of the new regime are expected
particular, it is clear that the negativity that sound principles in the Solvency II to change between now and the final
towards the new regime has increased Directive have been undermined by the implementation date (whenever that
markedly over the last few years. complexity of the implementation. may be!), the structure as currently
Although 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 this
appears to have grown substantially. This implementation, it would be all too easy stage, it is going to be far more difficult
has in part been caused by the constant for insurers to take the opportunity to and far more costly for them to pick up
delays, 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


Contacts

Simon Sheaf Stephen Kelly
General Insurance Practice Leader Risk & Capital Management Practice Leader
T +44 (0)20 7728 3280 T +44 (0)20 7728 3073
M +44 (0)7792 228065 M +44 (0)7976 963187
E simon.h.sheaf@uk.gt.com E stephen.f.kelly@uk.gt.com


© 2012 Grant Thornton UK LLP. All rights reserved.

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Solvency II – State of play

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