London - Eighty percent of major European insurance companies have begun their Solvency II implementation program, and, two-thirds (61%) see it as a means to improve all aspects of their risk management across the whole business, according to London-based Ernst & Young Global Ltd. However, while the benefits are welcomed, there is still much work to be done."The 2006 Solvency II Readiness Survey: Readiness and Beyond," published by Ernst & Young's Global Insurance Center, interviewed senior managers with responsibility for Solvency II in 54 of Europe's largest insurers, spread across 16 countries, with an average asset size of 110 billion Euros.

"Solvency II pressure on insurers is mounting and the timetable is becoming critical. While the industry is embracing the benefits, there are practical issues around readiness which must be overcome," says Lex van Overmeire, who leads the Ernst & Young Solvency II Taskforce. "Insurers are facing the challenge of developing internal models, the adequacy of information systems, the complexity of data requirements and the skills levels within their organizations."

The survey shows a strong appreciation of the enterprise-wide benefits of Solvency II. Only a small number of respondents see Solvency II as just an additional regulatory burden. Rather it appears to be driving a welcome need for improved risk management and an integrated view of risk across the whole organization. By enforcing entity wide internal controls and risk management, Solvency II is encouraging a more holistic approach, linking regulatory requirements to the requirements to monitor business strategy, according to the survey.

Niek de Jager, Solvency II taskforce member, adds, "Solvency II is driving the convergence of enterprise-wide risk management and the economic capital concept in global insurers. This is a great opportunity for them to optimize costs and drive real business value. However, in order to reap the benefits, companies need flexible information systems and data models. At present many existing information systems are not sufficient to support enterprise risk management, and temporary workarounds will only be more costly in the long run."

The survey highlights the key areas where a lack of readiness will impact on the insurer's ability to implement Solvency II effectively. Specifically these are:

  • Only one in five (20%) insurers believes their current capital models will comply with Solvency II; nearly half of insurers believe their internal models will need significant enhancement. Without qualifying models Solvency II using standard formulas is the only option.
  • Although half (53%) of insurers believe necessary changes to their information systems will not be a significant issue, the larger insurers in particular anticipate major changes being necessary to both information models and corresponding systems before they can produce all the data required by Solvency II. Without the correct systems the required information can only be delivered with significant additional burden.
  • Two thirds (64%) of insurers highlight a need to upgrade the skills of actuaries and risk managers to deal with the challenges of Solvency II; of these, 15% recognize their current skill base falls short of the level required and many anticipate difficulties in hiring competent people.
  • The importance of operational risk assessment seems to be receiving less focus at this stage and there is less modeling or measuring of these risks than other risk categories. This is due to an industry-wide lack of the historical data needed to enable effective risk management.

Jörg Behrens of Ernst & Young highlights comparisons for the insurance sector with the experience of the banking industry when implementing Basel II. "The banks experienced major systems, modeling and people issues which all led to significant cost over-runs. By recognizing these issues now, and taking action to put an effective enterprise-wide risk management process in place, insurers can capitalize on this necessary expenditure more rapidly."

Peter Porrino, leader of Ernst & Young's Global Insurance Center, concludes, "This survey is the first to be released by the Global Insurance Center and is closely aligned with our mission to help insurers address complex issues, such as Solvency II. However, complexity does not mean insurmountability, and Solvency II represents an excellent opportunity for the industry to take a significant step forward in the way it deals with risk."

Source: Ernst & Young Global Ltd.

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