InsuranceERM round table on Solvency II and Capital Management

Nice freebie from the InsuranceERM guys, covering a CRO/ERM Head roundtable touching on economic capital, internal models and Solvency II - the first of this double header is here. With representation from from all sides and sizes of the insurance industry spectrum, the views tabled should be useful for most practitioners in this space, even if some of it is not exactly new news.

They are relatively benign on controversial areas such as industry cost, and even positive when talking of Solvency II having provided an incentive to improve both risk and model governance in the here-and-now, regardless of the necessity from a pure compliance perspective.

Between the two, the following noteworthy views were tabled;

On Solvency II

• "...has to be considered now if, not necessarily when"
• "...from a non-life risk and capital perspective, Solvency II just does not work" - citing reserve risk specifically as inherently flawed 
• The UK's ICA+ regime "...pushes [Solvency II] back towards a more sensible view of capital"

On Internal Models

• "The main issue with the models is spurious accuracy and detail masking big assumptions, which is possibly a systemic risk"
• Regulators in some European countries think internal models are "unnecessarily complicated"
• In response to the suggestion that internal modellers could be "gaming the system" to reduce capital requirements regardless of risk profile, Aviva's ERM head noted that the FSA have identified through their own research that the ICA regime appeared to have done just that back in 2004
• It is "...inevitable that [the Bank of England wearing their PRA hat] is going to take a far more sceptical view of internal models", particularly where Internal Model SCR is lower than Standard Formula SCR
• On Use Test, "...potentially 3 or 4 years before the model is truly bedded in"

On Ratings Agencies and their capital requirements to maintain target ratings

• "...many people, especially in Bermuda, see ratings agencies as de facto regulators"
• "...may take internal models less seriously in the short term" off the back of Solvency II
• Ratings agencies capital requirements are "the worst common denominator" alongside SF SCR and IM SCR

I've personally been relatively well shielded from the extent of the discontent on the non-life side, but judging by the confidence intervals used by high profile insurers as their EC targets (frequently observed at 99.9-something/A or AA rating space), it's no surprise that ratings agency requirements are in many cases paramount - that business could potentially be dragging three or four capital measures to their respective Boards for the next 3 years (agency capital, IM SCR, ICA and SF SCR) is a grim prospect.

Perhaps of more immediate concern is the view that the FSA/PRA have the potential to be more cantankerous around internal models once they move into their new office - something to look forward to in 2013?