Reinsurance taken into account and technical rules relaxed

European regulator group CEIOPS’ chair Gabriel Bernardino has told Jörgen Holmquist, the director general of the European Commission’s Internal Market and Services Directorate General that Solvency II has been watered down and the regulators will continue to work with insurers.

In a letter he said: “As an example of the joint work with the industry, CEIOPS has been discussing concrete suggestions on the allowance for non-proportional reinsurance in the capital charge for premium risk, and has developed a proposal for the specification of undertaking-specific adjustment factors to recognise the risk-mitigation effects of such covers.

“The advice also includes proposals based on the work carried out since September 2009 in cooperation with industry for the development of standardised catastrophe scenarios.

“These scenarios aim at providing a more risk sensitive assessment of catastrophe scenarios in non-life and health insurance. The full range of scenarios will be tested for the first time in QIS5.

Health insurance

“With regard to Health insurance, CEIOPS has engaged with the industry in the discussion on the design and calibration of the health underwriting risk module, and has included a proposal for the recognition of health insurance pooling arrangements in the calibration.

“In this area, CEIOPS has invited the industry to bring forward a global approach which would allow for the harmonised treatment of health across different markets. Further improvements to the calibration have been made in the final advice.

Capital requirements

“To supplement its advice on the standard formula for solvency capital requirements, technical provisions and own funds, CEIOPS will also be releasing a calibration paper in time for the consultation on QIS5 to be held by the Commission.

“This paper will provide all technical background on the calibration of the standard formula as prepared by CEIOPS in its advice, and includes comprehensive information on the development of the extrapolation methodology for the discount rate for valuing technical provisions and the Cost-of-Capital rate for the calculation of the risk margin.

“Furthermore, CEIOPS will be publishing a preliminary assessment of the impact of the changes included in CEIOPS final advice, which forms the basis for the QIS5 proposals, compared to the proposals tested in QIS4.

Constructive discussions

“With this exercise, CEIOPS would like to contribute in a transparent and constructive manner to the discussions that are currently being held. CEIOPS underlines the need to have a view of the overall impact of the Solvency II framework, and therefore will be assessing the impact of the proposed changes in the specifications for QIS5 not only on capital requirements, but also on the calculation of technical provisions and on the level of own funds.

“The preliminary analysis shows that the solvency capital requirements will increase compared to QIS4. At the same time, the proposed changes in the specifications are expected to lead to a decrease in the required level of technical provisions.

“For the purpose of QIS5, we also expect the results to be impacted by the developments in the financial markets in the course of 2008 and 2009.”