Oct 10, 2012

What Is New with Solvency II?: The EU and US Insurance Solvency Regulation Landscape

Numerix Video Blog #3: What is New with Solvency II?: The EU and US Insurance Solvency Regulation Landscape

With the European Union potentially pushing back Solvency II implementation to 2015 (and possibly beyond), we thought it was important today to take a closer look at some of the drivers behind these delays, along with some of the broader regulatory challenges that the insurance industry is facing in general both in the US and EU.

In this video blog, we will dive deeper into these issues with Numerix Host James Jockle, SVP of Marketing, and Peter Abramovich, VP of Insurance Solutions, discussing the critical points behind the Solvency II delays, a recap of its main objectives, and the US Solvency Modernization Initiative (SMI).

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section below.

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Video Transcript - What Is New with Solvency II?: The EU and US Insurance Solvency Regulation Landscape

Jim Jockle (Host): Welcome to Numerix’s video blog. I’m your host Jim Jockle, and with me today Peter Abramovich, VP Insurance Solutions, at Numerix. Welcome Peter.

Peter Abramovich (Guest): Thank you Jim.

Jockle: So, in our video blog we’ve been talking about capital markets issues – Basel III, managing counterparty risk, CVA, DVA the whole debate around that we’ve been focusing on the OIS discounting rules and margining. But today this week in the news EU pushing back Solvency II yet potentially again and we haven’t talked about Solvency II on this blog or really in a while, it came out how many years ago so I thought today maybe we’d start the conversation a little bit of a primer on Solvency II what is it, let’s remind everybody then we can move from there.

Abramovich: Solvency II is a major overhaul of the European regulations for the insurance industry, and it’s supposed to replace the existing regulatory regime. Solvency II is mainly trying to achieve 4 main objectives, number one is to further standardize regulations of insurance industry across European Union, number two is to increase protection for policy holders, number three is to encourage market discipline and transparency for insurance companies, and finally number four is to strengthen the solvency protection system especially when it comes to enhanced risk management techniques.

Jockle: So three pillars of implementation, why don’t you walk us through those pillars.

Abramovich: Sure, there are three pillars to Solvency II, it has both quantitative and qualitative requirements as well as market disciple, so in order for companies to successfully comply with these regulations and also to be able to compete in the market place more effectively they will need to build their own sophisticated internal models that analyze risk and probably what’s even more important they will need to be able to show their view to regulators.

Jockle: So when you say analyze risk bringing capital markets as well as liability management in a single framework, very challenging. Is that one of the drivers behind this delay, it was 2012 and now we’re looking out to 2015 what are the drivers behind this delay?

Abramovich: Well there are several drivers behind the delay I think this is exactly one of the biggest issues that faces Solvency II currently is the fact that it looks to be delayed even further as you just mentioned and most of that is due to the fact that the most recent meetings between the European Commission and the European Parliament they could resolve some of the critical issuers for example they couldn’t come to an agreement on the treatment of long term guarantees within life insurance and pension products so like you said originally the Solvency II regime was due to be implemented this year in 2012 but then last year it was pushed back to January of 2014 and now the delays are one year possibly even longer are being reported. So that’s generally not good news for insurance companies that have been on the road of implementation and preparation for this regulation for a long time. And they invested a lot of money, resources and time in to this project now they will not be able to see the practical benefits for several years.

Jockle: So if you look back at cost estimates it was billions that have gone in to it in terms of compliance. Let’s jump across oceans at this point. The US clearly a different regime, you have the National Association of Insurance Commissioners (NAIC), every state has its own regulator but looking across the pond to see what’s going on – how are the two regimes mirroring each other and where is the US today?

Abramovich: The US has also had its share of various regulations of the insurance industry. One of the more recent examples of that is the Solvency Modernization Initiative (SMI) and this initiative has been set up to one – review the current US solvency protection system after the financial crisis, two – is exactly what you just mentioned in order to gain Solvency II equivalence. So the US is eventually is trying to move in accord with the European regulations. Historically the US regulations around statutory capital requirements were formula based and didn’t take in to account all the risk and all the complexity of insurance products that he companies bring to the market. In the past decade however, there’s been a shift away from this formula based approach to a principle based approach for capital and reserves. And this principle based approach uses risk analysis and risk management techniques that capture the risks imbedded in life insurance and annuity products much more accurately than the original rule based approach. 

Jockle: So essentially not just better capital management and solvency but also an increased complexity in order to manage your business. I’m going to wrap here for today because as we move forward in this we’re definitely going to get in to more granular elements of capital accuracy modeling, asset liability modeling in upcoming video blogs, but I figure today was a good starting point let’s get on top of the news and I’m sure I’m going to get you back in this hot seat again.

Thanks for joining our video blog on Solvency II, I’m Jim Jockle please follow nxanalytics on twitter as well as check out our regular blog on numerix.com for regular updates. Any ideas and suggestions please feel free to email me or email marketing@numerix.com.

Thank you Peter.

Abramovich: Thank you Jim.



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