Solvency II implementation in UK may dramatically increase capital requirements

The implementation of Solvency II could result in a minimum capital requirement increase of 62% for United Kingdom insurers, according to EMB, a UK-based actuarial consulting firm.
EMB studied 49 companies, covering a broad range of non-life insurance sectors —including personal lines, commercial lines, Lloyd’s, P&I clubs (protection and indemnity insurers), and other London Market sectors — all ranging in size.
Due to amendments to the Solvency II regime since the fourth quantitative impact study (QIS4) done in December 2007, firms surveyed by EMB saw an average increase of 62% in the solvency capital requirements (SCR).
Key findings included:
•    P&I clubs were the most adversely affected, with an average increase of 90% over QiS4 levels;
•    Personal lines firms saw an increase of 54%;
•    Commercial lines firms, Lloyd’s syndicates and other London Market firms all saw an average increases of 60% to 62%.
“Interestingly, there did not appear to be any change in the impact for companies of different sizes; larger firms saw similar levels of increase to smaller entities,” an EMB release says.
EMB points to the updated premium and reserve risk factors (specified in the Committee of European Insurance and Occupational Pensions Supervisors consultation paper 71) as contributing a 43% increase in the total SCR.
Other major drivers of the increase include the correlation between catastrophe risk and premium and reserve risk, the loss of geographic diversification and the updated operational risk factors, EMB said.
“Clearly if these results hold it will seriously damage the business model of several firms,” Raj Ahuja, a partner at EMB and study author wrote.
“For complex insurers and reinsurers, the standard formula approach is unlikely to be representative of the true underlying risk profile,” he continued.
“Companies should ensure they undertake specific parameter reviews and build internal models that are tailored to each company.”