29 July 2010
Published in: Regulation - supervision
“Industry needs to find QIS5 consensus”
The insurance industry must find a common interpretation of the technical specifications in the fifth quantitative impact study (QIS5), Barrie & Hibbert said today.
QIS5, which is currently under way, aims to provide the European Commission with information about the impact of Solvency II on companies' balance sheets.
But Barrie & Hibbert believes that some areas of the QIS5 text are ambiguous and will cause problems. "If companies adopt different interpretations, the whole purpose of QIS5 could be invalidated," Stephen Carlin, life insurance product manager, said.
"That is why the industry needs to quickly develop a common understanding and approach to the implementation and interpretation issues," he added.
Barrie & Hibbert released the findings of a survey of European insurers which aims to make companies aware of the different interpretations being made across the industry and to identify where they hold a minority view. The survey focused on the ambiguity about the use of stochastic asset models, an important part of the process of placing a market-consistent valuation on complex liabilities.
The survey showed a range of interpretations on defining the base scenario cases. On the basic question of how to apply the illiquidity premium to a liability requiring stochastic valuation, there was a 70:30 split with 30% wanting to apply the illiquidity premium outside the economic scenario generator (ESG). There was also disagreement on which yield curves benefited from the illiquidity premium, with a slight majority applying it to the real and nominal curves but a significant majority intending to apply it only to the nominal yield curve.
The responses also showed a range of interpretations on the calibration of the standard-formula stresses. The most ambiguity is about the interaction of the credit spread and the illiquidity premium in the stressed scenario.
On the wider issues there was more agreement. There was a clear majority view (59%) that further research is required on how to introduce an illiquidity premium into a stochastic valuation.
Barrie & Hibbert said that, to date, work on this topic has concentrated on quantifying the illiquidity premium present in assets and classifying liabilities by an illiquidity measure. The question of how to allow for the illiquidity in a stochastic-liability valuation has received much less attention.
The survey findings can be obtained by emailing qis5@barrhibb.com.