‘If the pendulum does swing too much towards the compliance side, it can become an obstacle to trading’
Solvency II could result in some insurers pulling out of writing certain business altogether, Barbican director of risk and governance David Russell predicts.
Speaking at the recent Insurance Times/MSM Risk Management roundtable in London on 23 September, Russell said: “If you take a long hard look at some of the lines of business you are in, you’ve got to do it in a methodical and analytical way. Then you may come to a conclusion about particular lines not being economical.”
QBE head of risk management services Richard Thomas forecast that the structure of the Solvency II regime would change over time.
“The nature of Solvency II will change because insurers and insurance markets are constantly changing,” he said.
But he added that the biggest problem insurers faced in seeking a flexible interpretation of the rules of Solvency II was whether their regulators understood them.
He said “If you look at a commercial portfolio such as QBE’s, it goes from pedalos to satellites. Understanding the diversity of
all those organisations, how they manage their own risks and the parts of the risks they transfer to us, is incredibly complicated.”
What I worry about with Solvency II is that it is about taking quite a good idea and swamping it with bureaucracy, so that it becomes a very compliance-driven activity. Lots of the common sense parts get overlaid by that”
David Russell, director of risk and governance, Barbican
There is a potential that these things are being done because you tick a box and everyone’s happy, but the real value to the business is doing things in an efficient way”
Richard Thomas, head of risk management services, QBE
Some companies are discussing whether the market now is the new normal. There have always been variations in terms of competitiveness, players coming in and out of the market and different appetites for business. But the pronounced variation has started to flatten out. I still think there will be variations”
Neil Clutterbuck, commercial director for underwriting and technical, Allianz
Airmic technical director Paul Hopkin warned that it was too easy to look at Solvency II as a compliance rather than a risk management exercise.
“If that pendulum does swing too much towards the compliance side, it can become an obstacle to trading,” he said.
Still, according to Allianz commercial director for underwriting and technical Neil Clutterbuck, Solvency II has kept the issue of risk management at the front of executives’ minds.
He explained that Allianz held quarterly meetings to discuss the top risks across the business and how to manage them.
One danger with compliance under Solvency II is that of getting lost in the Byzantine structure of the regime, he added.
“If you don’t maintain a pragmatic overview of what you are fundamentally trying to achieve, there is the danger that you will get lost in the myriad issues that need to be considered and will not actually take action that is appropriate to the business,” he said.
Having a set process to tackle Solvency II was important to avoid getting lost, he added.
David Russell, Barbican director of risk and governance
Insurers working towards Solvency II conformity risk getting bogged down in detail, concentrating too much on compliance and ignoring possible benefits, Barbican director of risk and governance David Russell warned.
“I’m slightly worried that it’s not just a step forward - there is the potential for a couple of steps backwards, too,” he said.
But Russell added that Solvency II was unlikely to save insurers money. “There’s a lot of cost involved,” he said. “There will be better understanding of our businesses, we will better target what we do and better manage risks, but overall the numbers will be the same as they’ve always been, I would guess.”
Insurers could benefit from the standardisation of requirements across Europe, he said. But the standardisation would not apply across all countries, and would take a long time, he said.
On the positive side, Russell noted that Solvency II had led to more interaction between risk managers and underwriters, together with a more analytical approach by the latter. “I think maybe it will help the industry anticipate the cycle a bit better,” he said.
Neil Clutterbuck, Allianz commercial director of underwriting and technical
Solvency II will enable insurers to use capital in a more efficient way, said Allianz commercial director of underwriting and technical Neil Clutterbuck.
“If you understand your portfolio and you understand your capital requirements and the levels of allocation against particular lines of business, it gives you the option to make strategic choices about where you choose to invest that capital for the future,” he explained.
A better understanding of how to deploy and invest capital will also benefit the policyholder, he said, adding that every insurer will see different benefits according to their risk portfolio. “I certainly think it’s helpful to understand the business process, the operational process, and the financial dynamics that are specific to an insurance company and how their capital model works,” he explained.
Having different sections of the same insurer each preparing for Solvency II could bring benefits, he added.
Richard Thomas, QBE head of risk management services
Using the Solvency II preparation process for wider purposes is something that some insurers are not doing, QBE head of risk management services Richard Thomas said.
“The ability to sensibly assess risks, look at the data that supports that and get a feel for probabilities and potential outcomes is part of what may be lacking,” he explained.
Thomas said he had a background in chemical engineering, and that risk management was built into that industry’s operation and thought processes.
The level to which the regulator will examine insurers is likely to be hands off in some areas, Thomas said, using pricing policies as an example. “Is the regulator’s job to compare pricing policies? Or is it to determine whether or not the organisation has gone through a process itself to determine whether it is comfortable with its own risk?”
Risk managers checking the risks in an insurer’s portfolio had a big impact on underwriting, he added.
“That’s one of the interesting places in which we are seeing a change in dynamics of the risks we insure,” he said.
“The data available to look at that is key for the underwriters to be able to price correctly. That then feeds through to capital allocations.”