London — More than three-quarters of large European insurers expect to spend less than €25 million through 2012 on Solvency II compliance, with more than half of those expecting to spend less than €5 million, according to results of an Accenture survey. Specifically, one-third of the insurers surveyed said they expect to spend between €5 million and €25 million on such compliance, with an even greater amount (43%) expecting to spend less than €5 million.
These costs are likely to come from process and technology enhancements. Less than 20% of the insurers surveyed said they consider themselves well prepared for the start of Solvency II. Processes, IT systems and risk quantification and modeling capabilities are the areas where they see the most significant need for improvement.
The survey also found that insurers believe that many of their core risk-management capabilities need to be enhanced. The core capabilities where respondents identified the most significant need for improvement were risk-based product pricing (cited by 89% of respondents), the integration of risk management and governance into decision-making processes (80%), underwriting portfolio management (71%), asset and liability management (70%) and asset portfolio management capabilities (63%).
In addition, while the vast majority (93%) of respondents said they believe Solvency II will increase the importance of risk-management capabilities, a significant number said their organization needs to enhance their risk infrastructure in order to better identify, assess, quantify and monitor risks.
The European Union's Solvency II directive calls for a common set of solvency regulations for insurers across Europe by 2012, including the enactment of new rules regarding the levels of capital that EU insurers must set aside to cover their combined risks and liabilities.
Global insurers add Solvency II to their long lists of regulatory concerns. According to London-based Centre for the Study of Financial Information's (CSFI) 2007 Banana Skins survey, in association with PricewaterhouseCoopers LLP (PwC), New York, regulatory overkill is the greatest risk facing the global insurance industry. The survey quotes the chief executive of a major UK life insurer as saying: "Regulation is becoming ever more intrusive, time-consuming and box-ticking. This is despite the rhetoric about principles-based regulation."
"The focus on regulation will only increase over the next few years, as insurers face a number of new demands, not least the coming overhaul of financial reporting and Solvency II," adds Mike McColgan, partner and metro insurance leader, PricewaterhouseCoopers. "A key challenge is to develop effective risk management systems that can provide both compliance and also improved business execution."
Considering Solvency II in the larger context of strengthening their enterprise, 75% of Accenture's respondents believe their compliance investment will support business needs. More specifically, 94% believe it will increase stakeholders' confidence in risk control and management, 88% expect it to increase stakeholders' confidence in the insurers' capital reserves and 85% expect it to provide enhanced capital management.
"European insurers believe Solvency II will give them a competitive edge, but our findings indicate that many companies still don't have the necessary risk-management basics," says Eva Dewor, a senior executive in Accenture's Insurance practice. "To take advantage of Solvency II, insurers must better integrate risk management and governance into their decision-making processes while improving their portfolio-optimization and pricing capabilities."
Among the survey's other key findings:
* Nearly all (98%) of the insurers surveyed said they expect Solvency II to have an overall positive impact on th insurance industry, and 95% said they expect a positive impact on their company.
* An increasing number of insurers are moving swiftly in preparation for Solvency II. Although the date of final text of the directive has been revised and is now expected in 2010 with implementation not likely until 2012, two-thirds (66%) of the insurers surveyed have already enacted formal programs to plan and mobilize for Solvency II, compared with only 49% of respondents in a similar survey Accenture conducted in 2006.
* The vast majority (93%) of the insurers plan to use their own internal models instead of the standard formulas provided by the Solvency II regulators for calculating their solvency capital requirements.
* A wave of merger and acquisition activity is expected. More than four-fifths (84%) of respondents expect the implementation of Solvency II to increase consolidation in the insurance industry.
* Small insurance companies will suffer the most. Four in five respondents (82%) said they foresee small insurers as the likely losers from the Solvency II directive, while the same number (82%) said they believe large companies will be among the winners.
Sources: Accenture, INN archives
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