Insurers switch capital model for Solvency II

About half of insurers are preparing for Solvency II by changing the way they calculate capital adequacy requirements, a survey by business advisory firm Deloitte has revealed.

Conducted by the Economist Intelligence Unit, the latest edition of the annual Deloitte Solvency II survey of insurers found that 51 per cent of 60 respondents plan to change their approach to calculating regulatory capital. Of those, 60 per cent have increased the sophistication of their approach.

Of those who are changing their approach, 37 per cent are switching from a partial internal model to a full internal model, and 23 per cent have moved away from the standard formula approach.

An internal model is a regulator-approved model which is custom-designed for an individual company, as opposed to an off-the-shelf model which may cost less initially but in some cases would mean higher capital requirements.

Four out of 10 of those changing their approach have chosen a simpler method, with 10 per cent moving from a full internal to a partial internal model, 13 per cent moving from a partial internal model to the standard formula and 17 per cent from full to standard.

Rick Lester, lead Solvency II partner at Deloitte, said: “Solvency II forces insurers to analyse the risks they run across their business and determine the level of capital they need to hold.

“Risk models lie at the heart of the rules and enable insurers to calculate capital requirements in line with the level of risk they are taking.

“Insurers use internal models if they believe they are a better reflection of their risk profile than standard models. There is a cost to adopting them, but there are also potential benefits because they can give a better understanding of risk, which should enable better business decisions and may ultimately lead to lower capital requirements.”