13 November 2009
Published in: Capital - models, Operational risk, Regulation - supervision
Internal model rules unchanged and onerous
Commenting on the final advice issued this week on the Solvency II level 2 implementing measures, KPMG's Elliot Varnell said the liquidity premium, operational risk and own funds are the major areas of change made by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) from its position in the consultation papers issued this July.
"The industry will be pleased with some of the advice," Varnell said, "but they will not think it has gone far enough in terms of reducing the overall burden created by the pack of proposals set out in July. Whilst there have been some changes, most of the proposals have been carried forward unadjusted into the advice put forward to the European Commission."
For example, he said, in July CEIOPS released over 200 pages of advice on what insurers had to do to get internal models approved. "All the requirements on internal models have remained the same. In particular the documentation requirements that need to be met remain onerous."
Furthermore, Varnell commented, "The non-life industry had been keen to get a geographical diversification into the standard model, which it now appears isn't going to happen.
But he added, "One area where the capital requirements have been noticeably scaled back is operational risk, with some limited capital reductions made for life and counterparty default and concentration risk."
The issue of liquidity premiums has dominated the headlines in the UK, where insurers are particularly reliant on annuity business. Varnell stated that, in his view, whilst the advice put forward is a step in the right direction, the restriction to make this only apply to business in force when Solvency II is introduced will not go as far as UK annuity providers would have liked.
"The combined effect of a reduction in tax incentives for pension savings and the potentially lower returns may discourage people from using this traditional method of providing for their retirement."
To read more of Varnell's commentary, see IERM analysis "Pluses and minuses: the final advice weighed up"