Malta grapples with Solvency II

The Actuary reports on how the EU’s smallest member is handling the prospect of Solvency II. It’s a nice story because it makes this monster of a topic manageable, since Malta – a spec just south of Sicily – has less than €1B in premiums (life and non-life combined).

The main QIS4 results were:

  • Solvency ratio under Solvency I was 291% for all insurers. In QIS4 the Solvency ratio was reduced to 187% (cf. CEIOPS QIS4 report, Annex, Table 29,A-34 and Table 35, A-40)
  • Five of the 16 companies saw a decrease of at least 50% in their available surplus (cf. CEIOPS QIS4 report, Annex, Table 14, A-19) Three of the 16 companies did not have sufficient ‘own funds’ to fund their solvency capital requirement (SCR) (cf. CEIOPS QIS4 report, Annex, Table 14, A-19).

Available capital cut in half – that’s a pretty big deal, eh? And this was from 2007’s QIS4 – before the market meltdown of 2008. And QIS5, going on now, won’t help things:

  • The correlation within some of the risk modules has been increased, with only a few reductions proposed (for example, there is now a dependency factor of 25% between the premium and reserve risk in the non-life underwriting module). The consensus among many commentators is that this is expected to increase capital requirements further.
  • Within the non-life underwriting risk module, there is now an increased allowance for the use of non-proportional reinsurance. An adjustment factor may be multiplied with the capital requirement for the premium risk. This adjustment factor will reflect the extent of coverage provided by the reinsurance arrangement more accurately than in QIS4.

The article’s authors, Jean-Paul Shipley and Louis Heng of Munich Re, see four likely options: restructuring, raise additional capital, better asset-liability management (especially among life companies) and increased purchase of reinsurance.

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