European insurers and reinsurers prepare for Solvency II

LONDON--European insurers and reinsurers expect to make significant improvements to their risk management capabilities as they prepare for the coming Solvency II directive, according to a study.

They are most concerned with improving skills that help quantify risks under the new risk-based capital framework that is expected to appear in draft form next summer and be implemented in 2010, according to "The 2006 Tillinghast ERM Study," released earlier this month.

The survey, conducted in June and July of this year by the Tillinghast division of Towers Perrin, involved more than 200 insurers and reinsurers. It was aimed at determining how widespread enterprise risk management has become among those companies and also uncovered several global trends affecting them. A section of the survey specifically for European companies focused on the Solvency II issue.

Enhancing risk quantification capabilities was cited by 63% of European insurers and reinsurers as the action they felt was most important to take as the new requirements loom.

"The more sophisticated companies are already several years into the process of building internal models to manage risks and calculate capital requirements," Ian Farr, London-based Towers Perrin principal, said in the study. "Others had been hoping to use a standard approach, but there is an increasing concern that this might require excessive capital."

The Solvency II directive is expected to urge insurers and reinsurers to use internal models to calculate their capital needs, but also contemplates a standard model for those who choose not too.

European insurers and reinsurers also indicated that they are concerned with enhancing actuarial and accounting tools and embedding risk management throughout their entire organizations as they prepare for the implementation of Solvency II.

The survey results showed some differences in concern among insurers and reinsurers in the United Kingdom and those in Continental Europe. Those in the United Kingdom felt Solvency II would have fewer implications on their operations.

"U.K. insurers clearly feel better placed as a result of the regulatory changes introduced by the FSA in advance of Solvency II," Mr. Farr noted. "Their focus has moved away from the core risk governance and risk identification capabilities, with attention now directed more towards embedding risk management in the business and developing actuarial/accounting tools to suit the new environment."

The survey is available online at www.towersperrin.com/tillinghast.