Many U.K. insurers still lack specific, embedded capital models required for Solvency-II compliance

The biggest challenge for insurers in complying with risk-based Solvency II requirements is likely to involve the development of specific internal capital models and embedding those models into day-to-day business practices, a U.K. chartered accounting firm suggests.
In its Spring 2009 newsletter, Insured Interest, U.K. chartered accounting firm Moore Stephens notes a Solvency II-compliant internal capital model will likely be much more granular than an insurer’s current internal capital model.
The Solvency II-compliant model, the newsletter says, “needs to be constructed in such a way that it can drill into specific areas of the business, rather than merely identifying the whole-account picture.
“In this way, it will be possible to establish the correct capital loading factor needed for a particular class of business to be profitable.”
Specificity is key, the newsletter emphasizes. “The internal model must have a high level of granularity, and the information generated must be capable of being fed back into underwriting, reinsurance, claims and other functions in order to create a better business and/or book of business.”
Some insurers may have already incorporated some of these elements into their models, but in order to be Solvency II-compliant, the models must be embedded into the structure of everyday operations, Stephenson Moore points out.
The models “must be capable of anticipating changes in the industry or in the financial markets, or at least reacting to change — as for example in the case of the current credit crunch — quickly enough to protect the business.”
Many U.K. insurers haven’t yet achieved the level of sophistication required of their capital models in order to be Solvency II-compliant, Moore Stephens says.