Of Special Interest

20th March 2011

Towers Watson reports on Solvency II survey across insurers operating in UK

A third of insurers believe their investors still do not understand their own risk appetite, according to a recent survey by Towers Watson. The company asserts that this finding highlights the need for greater focus on the breadth of risks faced by insurers and that better transparency would enhance their industry standing. Colin Murray, director at Towers Watson, said: "Risk appetite appears to remain an underdeveloped aspect of many insurers' response not only to the external demands of rating agencies and regulators, but also in relation to achieving a strong foundation for strategic decision making. A clearly articulated risk appetite has become essential for businesses to achieve a higher rating and attract investors, which makes it a potential source of real competitive advantage." The survey also revealed that a majority (85%) of insurers are responding to Solvency II with plans to make use of their own internal models for regulatory purposes. Almost half (49%) considered the main benefit of an internal model to be for business purposes, such as for Solvency II, IFRS, and wider business decision making. Meanwhile, the main challenges for an internal model were perceived to be resources (28%), followed by data issues (22%). Colin Murray said: "With less than two years to go until Solvency II takes effect across Europe, it is a positive sign that many insurers have taken advantage of the QIS5 process to gain a better understanding of the regulation and what it means for their business. The continued demand for internal modelling reflects this trend, but insurers will need to remain focused on the wider requirements of Solvency II when developing their model as Solvency II is about much more than just capital adequacy." The other findings of Towers Watson's Solvency II survey include:
-The majority of insurers identified the risk margin to be the most difficult aspect of the Solvency II balance sheet (67%) to calculate, followed by determining the best estimate (13%).
-Almost half of participants (47%) were aware that their company had already started an implementation project for the upcoming IFRS standards on insurance contracts and financial instruments. Of those who said yes, 55% were actively linking their Solvency II and IFRS implementation projects.
-Only one company is definitely planning to publish their QIS5 results, with 82% saying that they were not intending to publish. The remaining 17% said they would publish results only if peers did so first.
-Regarding the allocation of capital to lines of business, 39% of insurers said that they did so based on their risk appetite / tolerance, while 56% revealed that their operating limits were driven by risk appetite.
Last month, Towers Watson asked 120 representatives from a range of insurers operating in the UK, including the life and non-life areas, a number of questions about Solvency II and QIS5.