QIS5 set to see an increase in Insurer failure rates:
As final implementation of Solvency II looms ever closer, more and more industry experts are now predicting a complicated and worrying time for a growing number of insurers. Willis Re have recently admitted their own fears for the UK’s smaller regional insurers, predicting that many more companies are looking likely to fail in QIS5 than did so in the previous such exercise QIS4.
In a recently released report the global insurance brokers reinsurance arm announced that Quantitative Impact Study (QIS) 5 is shaping up to be a far tougher test than its predecessor, of which only 11% of insurers failed. Whilst claiming that the failure rate will be “much higher, especially for smaller regional insurers” the report also warns that the smaller players as well as regulators will have multiple problems particularly when developing and reviewing internal models. One of the major reasons the report singles out the smaller players is the fact that they are often unable to benefit from the diversification credits that are available.
Commenting on the report, Willis’ MD for analytics and head of international enterprise risk management, David Simmons said “Solvency II and IFRS will have profound implications for all insurance professionals in Europe, but the repercussions will be felt worldwide with the new IFRS being adopted by most major economies in 2013 and the rise of Solvency II-like regulatory regimes worldwide.”
Meanwhile, the International Underwriting Association (IUA) has warned that the government’s plans to reform financial regulation within the UK are currently being heavily undermined by the demands being placed on insurance regulators as Solvency II implementation draws nearer. With demand for high quality regulators now often comfortably outstripping the supply, a lack of qualified and competent staff is proving to be a very real concern.
With a number of IUA members already having reported delays in approvals of internal models, many fear that the creation of the UK’s latest two new regulatory bodies the Prudential Regulatory Authority (PRA) and the Consumer Protection and Markets Authority (CPMA) will only serve to exacerbate the situation further.
Citing the FSA’s “declining prestige” as a major contributing factor to the current situation, IUA Director of Government Affairs, Nick Lowe commented that “there is a dearth of qualified and experienced staff competent to supervise the insurance industry.”
Whilst it is clear that the implementation of Solvency II has caused greater demand for regulatory professionals, many in the industry agree with Lowe’s opinion that the dramatic decline in standards at the FSA has meant that “many individuals with the right skills have taken their employment elsewhere.” in recent years.
As Lowe points out “regulators will have difficulty in recruiting people of the right calibre. An imbalance in supply and demand will mean that staff costs will be high.”
Not all corners of the industry are quite so gloomy in the face of Solvency II however and at the recent ABI conference PwC partner Charles Garnsworthy was able to highlight the competitive advantages that may become apparent as the EU directive takes hold.
Discussing the “great opportunities for insurers to transform how investors, analysts and policyholders perceive the security and value the sector adds” Garnsworthy sees this period of regulatory flux as one full of competitive opportunities.
In a bold and positive speech he asserted what he saw as the opportunity to “stand out from the pack” as he urged those insurers present to ensure that they don’t lose sight of the “strategic impact of Solvency II”.
Whilst I personally believe that the wholesale changes Solvency II will create across the entire general insurance landscape will certainly be felt in every corner of the industry, I absolutely agree that it is those companies that embrace the changes, rather than fight them, that will now flourish.
In Garnsworthy’s words “Solvency II will be a catalyst for managing risk and capital more efficiently and is a real chance for the industry to send a clear message to the markets that it can respond swiftly and decisively to opportunities.”
Whilst certainly many of the challenges that Solvency II is currently throwing up are extremely daunting to say the very least, the opportunities that are also being created are equally as exciting. One thing is for sure, we are now approaching one of the most crucial periods of change the industry has ever know.