New Regime Of Solvency Regulation Will Impact Insurers And Actuaries

Boston, MA – Changes to solvency regulation in Europe and the United States will have key implications for insurers and actuaries, attendees of the Casualty Actuarial Society (CAS) annual meeting heard during the opening general session of the meeting.

Session moderator Cara Blank, Actuary, Massachusetts Division of Insurance, led off the session by noting that the discussions of solvency regulation have become more heated, particularly in the last 18 months.  In addition to Europe and the U.S., a number of regulatory efforts and solvency proposals are underway in jurisdictions such as Australia, Canada, and Switzerland.

Kathryn Morgan, of the UK’s Financial Services Authority (FSA), gave an overview of Solvency II, the new risk-based solvency regime in Europe that takes effect November 1, 2012.

Ms. Morgan noted that Solvency II is a fundamental review of the solvency and risk management standards for European insurers that aims to strengthen prudential regulation of the insurance sector and to improve policyholder protection.
“The idea is that the system of regulation will be absolutely the same for all insurance companies across the EU,” she said.

Ms. Morgan observed that actuaries are at the heart of Solvency II, and it has significant implications for them. This is because the actuarial function is part of the new solvency regime.  However, as Solvency II is a wide-ranging regime, actuaries will need to work as part of a multi-functional team. 

She noted that actuaries will help fulfill the emphasis on technical provisions under Solvency II and that actuaries are also required to give an opinion on underwriting policy.

She explained that the European body of actuaries, known as the Groupe Consultatif, is working with industry and regulators on the technical and professional standards that could apply to actuarial work.

Building internal models is an area of focus. Under Solvency II, companies may build internal models to measure their risks and capital requirements, but the models have to meet a use test and significant governance requirements.

“European regulators have tried to learn from the lessons of the financial crisis.  We want to make sure that models are as useful as possible so each firm knows what the shortcomings are,” she said.

Ramon Calderon, Director for the Center for Insurance Policy & Research, NAIC, observed that while U.S. regulators welcome Solvency II for Europe, the new regime still raises questions.
“We’re all in the same boat. We seek prudent regulation and a competitive marketplace. But there are still open questions about Solvency II,” he said.

Calderon explained that some features of Solvency II have yet to be tested. “There is a lot of caution about the reliance on models and about how far we can go in group supervision,” he said.
By comparison, the U.S. solvency framework has been tested under fire. “It is a multi-jurisdictional system. There is a supervisory culture in place,” Calderon said.

With the exception of certain specialized monoline insurers, the U.S. insurance industry largely survived the economic crisis of 2008/2009. “This was because the underlying nature of the insurance business, the U.S. solvency framework, and fundamental risk management systems worked well together,” Calderon noted.

However, Calderon cautioned that U.S. regulators cannot afford to become complacent. As a result, the National Association of Insurance Commissioners (NAIC) adopted the Solvency Modernization Initiative in June 2008 that will identify potential changes to the solvency framework in the U.S.

According to Calderon, the U.S. is also active in international venues and taking leadership roles in International Association of Insurance Supervisors (IAIS) committees on solvency issues.
U.S. insurance regulators need to be engaged in the IAIS process, as they will be judged by the IAIS standards that are adopted, he added.

The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,100 members are experts in property/casualty insurance, reinsurance, finance, risk management, and enterprise risk management.