Category Archives: Solvency II

Europe’s 1-in-200 stress test: a EU36.7B catastrophe


European insurers have to be able to manage a regional windstorm that could cause 36.7 billion euros ($51 billion) in insured losses under proposed new risk-based regulation, Perils AG said.

Perils is the official scoreboard for European catastrophes, founded in 2009. It collects loss information about European cats, the major one being winter windstorms. In the U.S., PCS provides a similar service.

Solvency II calls for capital to cover a 1-in-200 storm. Perils estimated one for nine areas: Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Switzerland and the United Kingdom. The results are in the graph below:


That’s a lot of euros.

(I’m a little puzzled by the diversification effect in this chart. Usually diversification effects come from insuring different lines of business, so I’m not sure why a major storm would have a diversification effect. Could €36.7B be the capital charge stemming from an insured loss of €52.5B? Stories and the Perils press release aren’t clear. Feel free to clue me in via comments.)

By contrast, Hurricane Katrina is the worst U.S. disaster, with $41 billion in insured losses onshore, another $2 billion or so from offshore oil rigs and another $16 billion from flood insurance, which the federal government provides.

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RT @SolvencyTwo

RT @SolvencyTwo S2 delays unlikely || Call me skeptical, but story is a nice overview of where regulators think we are


Solvency II: When, oh, when?

Solvency II has always seemed a bit rushed by this observer on the left side of the Atlantic. Now Reactions offers free commentary that at least one Aon executive predicts delay of another year.

Writing an op-ed in the Baden-Baden Reporter, which will come out at the conference next week (and go online then), Aon Benfield co-CEO for EMEA Richard Posgate says it is becoming more and more unlikely that everything will be ready in time, and that he will not be surprised to see the whole process being delayed for another year.

That’s 2014 then.

The problems:

  • The latest quantitative test, QIS5, is due starting Oct. 31. The template that companies needed to fill out was issued Oct. 6.
  • The European regulator CEIOPS only just requested data to see whether property-casualty capital requirements have been set too high.

All of that has actuaries scurrying, I’m sure. But it’s also looking like there aren’t enough regulators:

“There are just a bunch of people in London and Frankfurt really driving the project and they are over-stretched. And every regulator in every country is struggling to get to grips with how Solvency II will affect every insurer in their jurisdiction. It is an unbelievable challenge for everyone involved.” So says Marc Beckers, co-head of Aon Benfield’s Risk & Capital Strategy team in the UK and EMEA, in another op-ed due to appear at Baden-Baden.

More delays would be unfortunate, of course, but the U.S. strategy undertaken by the NAIC starts looking good. NAIC will be tweaking its current capital standards model, hoping to have a model law in place by December 2012.

After that, state legislators would have to pass the law, so implementation might wait until 2014 or so. But now S-II may be moving to approximately the same timetable, with twice the agita.

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Solvency II: bummer for captives

Don’t know why a story about captives and Solvency II ends up in the KC Star, but here it is:

The European captive insurance market should be braced for considerable development as the industry continues to respond to the economic climate and pending regulatory requirements, a new A.M. Best report states.
A brief timeout: A captive is an insurance company with only a few customers, usually one, rarely more than 10. Typically a large non-insurer will form a captive to insure its own risks up to a fairly low limit, then buy additional coverage on the open market. The alternative would be to only purchase insurance with high deductibles (excess insurance), then make sure you have the cash to handle smaller claims. The captive is generally cheaper, because the premium the non-insurer pays the captive is tax-deductible, while the money you set aside to handle claims is not. The difference can more than cover the cost of operating the captive.
The Best report points out that under S-II, all companies, captives included, will have to have more capital. I’d add that as S-II adds demand for actuarial resources, the cost of operating the captive will also rise.
Meanwhile, the current market is not as favorable to forming or using captives as it normally is. The scenario I laid out – cheaper to buy coverage from yourself  – doesn’t work if rates are low. So a soft market means captives are used less. Best points out that one-fifth of captives are currently dormant, though they still require licensing fees, etc. – sort of the vampire appliances of the insurance world.
But this doesn’t signal the end of the captive:
The report also concludes that some parent companies are looking at ways to utilize their captives more fully and are considering using them to provide cover for risks that include credit insurance and employee benefits such as long-term health and long-term disability.
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Hey, Europe, where’s the data?

To properly calibrate the Solvency II model for property-casualty companies, CEIOPS, the European regulator has requested premium, losses and loss triangles by line of business.

The data call is here, including an explanatory note, and the data is due with the rest of QIS5, in November. The request seems pretty simple by U.S. standards – gross loss and premium data, gross data with catastrophes excluded, net data with catastrophes excluded. All data is by accident year.

In the U.S., much of this is compiled annually, in the Annual Statement. In Europe, it’s a data call – and one that’s fairly late in the process, by my watch.

And that’s what has always confused me about Solvency II, sitting here in the States. The data requested is fairly simple. And it seems as if it’s difficult to obtain. Yet the entire continent is about to set capital standards based on this threadbare data.

And there’s little industry-wide data, as far as I know. There’s no statistical firms like ISO gathering data from many companies. There’s no simple aggregation of industry results, as you’d see in Best’s Aggregates and Averages. No excess loss triangles to compare with what the Reinsurance Association of America pulls together.

In fact, actuaries in the U.S. joke about the European lack of quality data. One consultant told me he was amazed at the intricate mathematical sophistication of European actuarial science, all applied to crap data. The result could hardly be considered technical guidance.

And I’ve heard the joke go the other way: European actuaries laughing how Americans have too much data to do any real math.

Yet Europe is leading the way in terms of actuarial sophistication. Solvency II is more technical than anything the NAIC is likely to approve. European actuarial research is certainly the equal of that in the United States, and some would argue it is superior.

So what gives? How does European property-casualty insurance operate, given the lack of industry data?


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Follow the rules that aren’t quite written

At a Reactions magazine insurance event, U.S. regulators showed their frustration at having to qualify as Euro-compliant. Quoth FL Commissioner Kevin McCarty:

Solvency II is a theoretical standard – it is not in place yet. It is difficult to say what effect Solvency II would have, because it is not yet implemented, whereas we have 130 years of experience.

The problem: With Solvency II, Europe regulators have leapfrogged U.S. regulators. They are setting cutting edge standards, and the size of the giant European insurers and the openness of the market mean America has to follow. And the Americans aren’t used to that.

This year, the European regulator CEIOPS picked out the countries whose regulatory regimes could be ruled equivalent to the European standard. The U.S. got left off – blame America’s state-based regulation. We have 50 regulators. Europe has one. So the U.S. was too complex and too expensive to evaluate.

Given the pedigree of U.S. insurance regulation, that’s difficult to accept. NY Superintendent James Wrynn:

If you took the U.S. system and placed it over Europe, it would work perfectly with the EU member states.

And U.S. regulators are leery of S-II’s reliance on the company’s own computer models, Wrynn said:

Doesn’t the over-reliance on internal models complicate the role for regulators? Do they understand it? And people will game it, the Enrons of the world.

Meanwhile, U.S. regulators are doing their own update of solvency standards, the Solvency Modernization Initiative. As I’ve reported before, that is likely to keep the current risk-based capital system, but add some modeling for out-of-the-box risks like catastrophe exposure. The initiative will play out over the next couple of years.

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The future of actuaries – the view at Lloyd’s

InsuranceERM interviews Henry Johnson, actuary at Lloyd’s of London. The interview focuses on how the operation is adopting Solvency II, but I’d like to focus on other parts:

First, what capital regulation means to the actuarial profession. In short, actuaries are becoming more important contributors: Continue reading

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More slow-go on Solvency II

Only a few months ago, S-II implementation was pushed back to year end 2012. Now European regulators are hinting the new capital regulations will be phased in more slowly. Reuters:

Regulators may prove agile on timing, [top EU insurance regulator Gabriel] Bernardino said.

“What we envisage to be possible is to have some kind of transition period, where some areas can be implemented (gradually over time),” he said.

“Solvency II as a whole, as framework, we believe could and should be implemented in 2013.”

The problem, of course, is the dislocation the new standards will cause. Larger firms, in general, are well set. Smaller companies lack the capital they will need. They can rent it (reinsurance) or get new investors, the latter being problematic for mutuals, whose capital comes from policyholders.


Solvency II stiff-arms P&C, reinsurance companies – report

S-II will cost insurers, on average, two-thirds of their surplus capital, a Morgan Stanley/Oliver Wyman study concludes (pdf press release), with reinsurers and non-life (P&C) insurers hit hardest.

The European insurance capital standards have been in the works for several years and are due to be implemented at year-end 2012.

From the Financial Times:

While Brussels has since watered down the proposals, they still look significantly more painful for the industry than was expected before the crisis. Furthermore, the study predicts that the cost of capital for the industry in general is likely to increase as greater transparency in the new standards will expose the economic volatility of insurers’ financial positions.

Higher cost of capital means higher rates, which would make sense if S-II is making capital more scarce. Remember insurers and reinsurers rent access to their capital in case disaster befalls a customer.

It suggests the rules will lead to a wave of mergers and acquisitions as the industry is forced to face up to the need for a fundamental reform of the kinds of products it sells and how and where it sells them.

FT points to winners like Munich Re, Allianz, Aviva, Axa and Generali, whose diversified business gives them a break. The mergers will bring competitors to equal footing. It sounds like P&C-only companies will have to partner with a life company, but that’s just me trying to read between the lines.

Well-capitalized reinsurers will also benefit as smaller mutuals will need to buy reinsurance. FT continues:

“For non-life companies, the focus will be on increasing diversification and making sure they get internal model approval [which would reduce their capital requirements],” said Jon Hocking, analyst at Morgan Stanley. “Investors are going to be very surprised by how much non-life insurers’ capital will decline under Solvency II.”

Internal models, of course, are where the actuaries come in. S-II remains a boon for European actuaries.

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Insurance regulators may go back to college

Well, I’ve overstated a little, to intro this Reuters piece about a European college of supervisors for banking.

Bank supervisors from countries that oversee a cross-border bank would liaise with each other and more directly and regularly with banks on key issues such as risk management.

The aim is to spot problems before they get out of hand.

In banking, the idea is to allow regulators to coordinate across borders to make sure any issues get handled in the best interest of the bank, not the best interest of one nation’s regulators.

At this week’s Casualty Loss Reserving Seminar, regulators suggested to the actuaries that a college of supervisors could be a way to handle one of the stickier regulatory problems – regulation of insurance groups. Continue reading

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