KPMG welcomes yesterday’s publication of the results of QIS 5, the fifth European-wide quantitative impact study on the forthcoming Solvency II rules for the insurance industry.
Ferdia Byrne, insurance partner at KPMG, said: “Overall the results demonstrate that the insurance industry as a whole is well capitalised, in line with the new requirements. Fears expressed by the industry in 2009 that massive capital increases would be required in the UK have not been born out in practice. This is largely due to the extensive lobbying by industry to adjust the calibration, and an improvement in market conditions.
“However, a significant number of firms did not meet the requirements: 15% of participants across Europe, and 20% within the UK. EIOPA noted that there is a concentration of small insurers in this position.
“Companies have invested very significant resources in the development of their own internal models to determine the required capital levels. Interestingly, these models do not appear to result in a significant reduction in capital requirements for individual companies, although the results do show a material reduction in the group capital requirement when an internal model is used.”
KPMG identified four key consequences of these results.
- Some insurers will seek to reduce their exposure to certain types of assets. For example, corporate bonds attract significantly higher capital charges than sovereign debt despite the difference in risk profile of sovereign debt across the EU.
- There will inevitably be further consolidation in the industry, driven by companies seeking to increase diversification, which is rewarded under Solvency II. In addition, we expect that companies struggling to meet the new capital requirements may look to merge with, or be acquired by, companies with higher levels of capital.
- The new regime is based on fair values of assets and liabilities, and will inevitably bring volatility to traditional measures of financial strength. This will probably increase the use of hedging and reinsurance to manage the capital position.
- Many companies operate multiple subsidiaries across the EU, which makes it more difficult to obtain credit for diversification. We expect more companies to change corporate structure, for example by using branches across the EU, thereby improving the capital efficiency of the business and reducing the number of regulators that they need to deal with.
Ferdia Byrne, continued: “While overall participation was almost 70%, a significant increase on QIS 4, a substantial number of companies did not participate. This may be due to the complexity of the new regime and some companies may have been hoping for transitional measures for more time to catch up.
“The recent comments on the transitional framework announced under Omnibus II have led to confusion as to how widely transitional measures may be applied. In its letter to the Commission on the QIS 5 results, EIOPA has identified only three areas for transitional measures – third country equivalence, treatment of hybrid capital and subordinated debt and discount rates on technical provisions.
“Transitional measures are helpful to ensure a smooth transition to Solvency II. This additional clarification was needed and we note that the proposed transitional measures are limited.
Companies should not assume that transitional measures will delay Solvency II implementation and should continue to aim to be ready for a 1 January 2013 start date. This could be a significant challenge in some areas, especially as the European Parliament is not planning to finish its considerations of Omnibus II until November 2011.“
For further information please contact
Monica Fiumara, Senior PR Manager, KPMG
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KPMG Press Office: 020 7694 8773
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.