Solvency II: latest news, August 2011 edition

Is a full internal model a step too far?

Choosing between an internal model and the standard formula not only has a strong influence on an insurer’s capital requirements, but also affects how the company is run and engages with its stakeholders. It is important to regularly review the decision to make sure it still meets the organisation’s best interests as its business profile and the market landscape evolve. The potential for transitional measures and a delayed implementation date provides an opportunity to step back and review the decision.

So, what are the main advantages and disadvantages of adopting an internal model and standard formula? And, is there a middle way?

Key points:

• The chosen approach must appropriately reflect the insurer’s risk profile.
• Insurers want to optimise their statutory capital requirements; however, an appraisal of which approach to take should cover the full costs & benefits and the effort involved.
• There are also wider considerations such as the uncertainties attaching to each approach (regulatory uncertainty) and the impact on how the company is perceived (strategic considerations).

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Managing Solvency II’s impact on your credit rating

Although rating agencies recognise that Solvency II will likely have a positive impact on how insurers manage their risks, their evaluation criteria are unlikely to significantly change or be influenced to any great extent by regulatory assessments.  What is important for companies’ ratings, however, is how Solvency II will affect their business, since the new regime may affect companies’ capital positions or lead to strategic change.

Companies should therefore engage with their rating agencies sooner rather than later and explain to them how Solvency II-implementation has strengthened their ERM capabilities, what the latest quantitative impact study revealed about the likely impact of the directive and what adjustments they are planning to the strategy and make-up of their businesses. Poor communication has the potential to negatively impact companies’ ratings.

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Managing spreadsheet risks

This article explores the importance of developing and implementing a systematic, strategic approach to managing and mitigating spreadsheet risks and looks of ways of doing so.

Key points:

• The benefits of a more systematic and strategic approach to managing and mitigating spreadsheet risks include standardised organisation-wide controls and reduced reliance on key personnel and local administration. This in turn helps provide boards and supervisors with greater assurance over the controls in place.
• An important first step to developing more-systematic controls over spreadsheets is to map the processes and associated risks surrounding their use.
• It is important to assess how input, processing and outputs will be affected by the heightened demands of Solvency II. The results will help insurers begin to assess which end-user controls are business-critical and identify which are the most complex and vulnerable to risk.
• It can be helpful to create a centralised support platform to take care of maintenance and development.
• The longer-term goal is more-automated spreadsheet controls.

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