Insurers still “playing catch-up” on capital management: KPMG

Insurers still have a way to go to catch up with their banking and investment industries in effectively managing capital, according to a new survey by KPMG.
The “Risk and Capital Management” survey of insurers worldwide finds their responses reflect the views of industry analysts that insurers are improving their ability to manage capital, but still lag other financial services.
“The industry as a whole has not fully embraced the need to calculate economic capital,” notes survey author Peter deGroot, partner in KPMG’s Netherlands office. “Although it is used as part of the planning process, for product pricing and to provide useful management information, it is some way from becoming a routine tool for influencing management compensation.”
The biggest challenge insurers cite to taking a risk-based capital allocation techniques are technical ones, such as IT, rather than resistance on the part of senior management. In fact, respondents say senior management are supportive of efforts to implement more sophisticated approaches to capital management.
Canada and Australia are singled out in the report for their risk-based capital regulation systems. Of the Canadian regulator’s “minimum capital test”, the report says: “Regulators around the world are now considering a similar evolution towards risk-based and future oriented solvency regulation.” Specifically noted are the required “dynamic capital adequacy testing” reports, which project financial results and capital results under various adverse scenarios. “These reports are used by regulators in their supervision, and can help management to consider how to better manage risks such as catastrophes, policy lapses or stock market falls.”
In Europe, however, insurers will have their work cut out for them when they must comply with the “Solvency II” requirements, expected to mirror Basel requirements for the banking industry. KPMG predicts Solvency II will “tighten up an industry that is felt by supervisors to be inefficiently managed and often under-capitalized, particularly when compared to the banking sector”.