16 February 2010
Published in: Capital - models, Regulation - supervision
Few companies would pass the “use test”, says S&P
Very few insurers currently meet the requirements needed to be granted internal model approval for Solvency II, according to a Standard & Poor's report published yesterday. The report outlines the differences between its own methodology for calculating capital adequacy and the methodology used for Solvency II.
The rating agency describes the internal model requirements as "challenging", and argues that insurers would particularly struggle to satisfy the "use test" based on current industry standards.
S & P's 15-page report compares its own model to the Solvency II standard formula for six main risks as well as diversification. It also offers arguments for selecting different approaches for some of the main risks, as well as outlining their weaknesses. The report acknowledges that "The Solvency II standard formula and Standard & Poor's capital model take quite different approaches to the problem of setting capital requirements."
The report also notes the difficulties in setting capital requirements under Solvency II, including the need to ensure the standard formula is pragmatic, the difficulty in finding appropriate data and the "significant amounts of judgement" needed at different stages.
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