London, 10 July 2007 — Ernst & Young welcomes today’s publication of the draft directives for Solvency II, which should ultimately lead to a more efficient European insurance market that would better serve the needs of both policyholders and shareholders.
Solvency II, when implemented in a few years, will see a change in the way insurers are supervised, with far reaching consequences. Insurers and reinsurers will have to be capitalized according to the risk in their portfolio and they will have to value their assets and liabilities according to economic principles. Ernst & Young believes Solvency II’s emphasis on risk management, corporate governance and responsibility will reward those insurers that are managing their business well and will lead to greater international competitiveness for the European insurance industry.
The current approach to supervision, Solvency I, is not sufficiently risk-based and is largely insensitive to market risk, so therefore contributed to the financial problems experienced by some insurers during the market downturn of 2001 and 2002. Solvency II, incorporating the lessons learned during that market downturn, requires capital for financial market, insurance and operational risk.
At the core of Solvency II is a new, principles-based approach to supervision, focusing on the outcome rather than on whether a company has followed prescriptive rules only. A principles-based approach is much more flexible and suited to a complex insurance and financial market.
Together with the proposed IFRS accounting standard, Solvency II will fundamentally reshape the European insurance and reinsurance industry, increasing competitiveness and making the EU insurance market a center of innovation and excellence.
A challenge for Solvency II will be to avoid political compromises when the more detailed implementation measures are formulated. To date, Solvency II has been discussed and developed mainly by technicians and specialists. If Solvency II in its actual implementation were to become more rules-based and less closely aligned to economic principles, its value would diminish and its results become less relevant.
Philipp Keller, of Ernst & Young’s Solvency II Taskforce, said: “The draft directives are a major achievement of CEIOPS, the Committee of European Insurance and Occupational Pensions Supervisors. The draft directives are the product of years of discussion, research and quantitative impact studies, involving large parts of the regulatory and supervisory community, the industry and academia, and are the basis for a thoroughly modern risk-based approach to the supervision of EU insurers and reinsurers.”
Keller continued, “Together with the expected IFRS phase II accounting standard, Solvency II will necessitate a rethinking of the current business model and finance function transformation. Many insurers will use their own internal models for Solvency II which will allow these enterprises to organize the regulatory capital requirements around their business and information model.
“There will likely be a greater use of the capital market to change the company’s risk profiles, leading to greater standardization of the packaging of risk exposure to allow effective risk transfer. Insurers should learn from the experience of Basel II — it is important to work out the appropriate path early on and then prioritize the necessary actions. This will help ensure robust solutions are found for the business.”
Keller concluded, “Solvency II will also have to address the question of cross-border diversification and the supervision of insurance groups operating both inside and outside the EU. The increased internationalization may eventually lead to global standards for insurance solvency, as envisaged and in development by the International Association of Insurance Supervisors. Solvency II will serve as a yardstick against which to measure such a future global standard.”
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About Ernst & Young’s Global Insurance Center and Solvency II Taskforce
The Center is the hub of the Ernst & Young network of professionals dedicated to serving the global insurance market and connects our people around the globe, sharing information and experience on current and emerging industry issues. The goal is to help our global insurance clients address their complex issues by drawing on our broad range of services including: assurance, tax, actuarial and risk management, regulation & compliance, internal audit, finance and performance management, transaction advisory services, and technology advisory to support these services.
Ernst & Young recognizes the importance of the development of a new solvency system for insurance undertakings in the EU and has set up a dedicated multi-disciplinary task force for this project. Our Solvency II Taskforce focuses on the conceptual development and related multi-disciplinary assurance and advisory services regarding Solvency II.
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