KPMG releases survey on insurance sector preparedness in CEE
The deadline for compliance is a bit more than two years from now (Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance-Solvency II. The articles of the Directive shall apply from 1 November 2012). The latest survey from KPMG, entitled Solvency II Readiness in CEE shows that many players within the industry are at a standstill in their preparedness towards Solvency II compliance.
It is a huge, complicated issue, according to Corina Cucoli, Director, Advisory Services at KPMG in Romania, who explains why some players within the region appear to be in no rush.
“Among enterprises that have not begun Solvency II preparations, the typical scenario in CEE is that a company belongs to a big international group that is developing a group-wide approach to Solvency II. Most companies in CEE are small - sooner or later they will adopt what the group dictates, so this is somewhat of a ‘wait and see’ approach. Their implementation is likely concentrated in the country where their headquarters is located.”
“On the other hand,” says Cucoli, “there are stand-alone companies which are not sitting and waiting although they have little or no support from the group and are not yet pushed by local regulators. They are likely to overcome any trouble with implementation more easily.”
Finally, she adds, there are a few big local groups in CEE, particularly firms in the Czech Republic, Poland and Slovenia, which are making visible progress in their Solvency II implementations on their own.
Regardless of their size or structure, their participation in the previous qualitative impact studies conducted by CEIOPS adds significant momentum to Solvency II preparations. “Our survey indicates that companies participating in QIS4 have their Solvency II project at a higher phase of development than companies which did not participate in QIS4,” says Cucoli.
“Also, companies which participated in QIS4 are more concerned about certain aspects of Solvency II implementation than those which did not. From this perspective,” she adds, “participation in the subsequent impact study, QIS5, appears to be essential. This would not be an easy exercise, given that participating insurance enterprises must comply with a 460-page document containing only the technical specification of QIS5 but it can be considered as a sort of rehearsal for the time when the ‘show must start and go on’.”
The Solvency II regime, according to Cucoli, is all about consistency with the market as well as sensitivity to and management of risk. “From this perspective it is encouraging that senior management and certain local regulators are seen by our respondents as clear drivers of the Solvency II implementation process.”
“It’s a new regime for determining capital requirements,” she explains. “It will harmonize the regulations of insurance companies within the EU and render them risk sensitive, which means the evaluation of assets and liabilities on an insurance firm’s balance sheet is consistent with what’s happening on the market.”
In the past, she says, the regulator allowed insurance firms to use a very broad formula, which was easy to calculate but did not give an accurate picture of their financial standing. With the introduction of Solvency II the industry must implement a more complicated system with increased sensitivity to risks that will require them to set aside assets to bolster their ability to make good on their customers’ insurance claims.
“Now,” Cucoli continues, “under Solvency II, the valuation of liabilities will not be regulatory-driven or subject to accounting-based rules. Both assets and liabilities will be valued on a market-consistent basis. So we’re moving in a direction to reflect the market on the balance sheet.”
“Using this approach,” she says of Solvency II, “capital requirements must be consistent, understanding the true risks and finding a way to hedge them.”
Of course Solvency II compliance can cost both time and money, but the added value results from the greater efficiency created by following the regime.
“The side effect of implementation is that the burden from the regulation side can help these insurance firms better understand what values they are creating or destroying within their company, especially in the form of embracing less risky assets.”
Angela Manolache, Senior Manager in the KPMG Advisory Services department says that KPMG’s Actuarial practice can assist insurance enterprises in CEE in the Solvency II implementation process, including helping them to interpret the complicated rules, and picking out the important bits for a specific company as each element of the regime is not applicable to every entity. “Specifically, we can assist companies with preparation of their QIS5 submissions.”
“Helping with the calculation, and helping to make the strategic benefits visible can result in real business benefits.
Meanwhile, re-doing internal processes to create a more transparent internal structure could produce lower capital requirements. There can be a direct impact on funding because the regulator can stipulate an additional charge if the company is in a mess.”
KPMG can also help in effectively managing such risks as well as assisting those insurance sector players who have every intention of meeting the Solvency II deadline of 2012.
“Many companies told us basically ‘We have achieved less in terms of compliance but are committed to doing something.’ So the willingness is there,” says Cucoli. “The bigger challenges of working on Solvency are the time constraint and the big agenda, especially if they are already finalizing reporting management.”