Ernst & Young recommends constructive evolution of regulatory guidance for insurance industry amid the financial crisis

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Zurich, 10 November 2008 – The insurance industry and regulators should use the current global financial crisis to drive a constructive evolution of regulatory guidance, says Ernst & Young’s Global Insurance Center.

The insurance industry faces fewer urgent liquidity challenges compared with banks. However, the valuation of assets has been severely affected by the crisis and capital reserves in many insurance companies have been severely depleted.

“This is a clear sign that the interconnected web of the global financial markets has far greater implications than the industry could have predicted,” says Philipp Keller, leader of Ernst & Young’s Solvency II Taskforce. “The significant impact of the financial crisis highlights the need for enhanced risk management. It is our view that a principles-based, economic and risk sensitive approach such as Solvency II, grounded in solid governance and supervisory principles, is the right response at this time. This will produce timely, consistent and transparent messages to the public.”

Principles-based regulation places responsibility for risk management with the management and board of the regulated companies. It drives risk management standards appropriate to the complexity of the business. This will foster understanding and accountability for the risks taken but will also produce a major challenge for management teams and boards.

In addition, the Solvency II Pillar II standards on risk management, and the market discipline encouraged by Pillar III, add a qualitative dimension to complement the quantitative capital requirements. This will help avoid over-reliance on models, which was a key feature of the crisis for the banking industry.

Keller comments, “We have to recognise that a regulatory framework like Solvency II in its currently anticipated form, while a significant improvement on current prudential supervision, will never be able to provide all the answers and can only be one element of sound risk and capital management.”

Ernst & Young urges the industry and regulators to make use of events such as the current financial crisis to drive a constructive evolution of the regulatory guidance. This evolution should:

  • complement the Solvency II regime with short-term liquidity testing and cashflow analysis to allow a more holistic approach to anticipating the impact of adverse events
  • place more emphasis on the articulation and testing of company-specific threat scenarios, in addition to the standard quantitative requirements

The current development and the anticipated implementation of the Solvency II framework should be continued in close cooperation between regulators and the industry.

Ernst & Young maintains a Solvency II website that provides up-to-date information on proposed regulations and commentary on the potential impact of the Solvency II framework.

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About Ernst & Young’s Global Insurance Center

Insurers must increasingly address more complex and converging regulatory issues that challenge their risk management approaches, operations and financial reporting practices. Ernst & Young’s Global Insurance Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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