Insurers calculating capital differently, says survey

Insurers are preparing for the introduction of Solvency II by changing their approach to calculating capital adequacy requirements, according to a survey by Deloitte.

It found that just over half of respondents plan to change their approach to calculating regulatory capital.

Of those, 60 percent have increased the sophistication of their approach, 37 percent are switching from a partial internal model to a full internal model and 23 percent have moved away from the standard formula approach.

However, 40 percent of those changing their approach have chosen a simpler method, with 10 percent moving from a full internal to a partial internal model, 13 percent moving from a partial internal model to the standard formula and 17 percent from full to standard.

“Solvency II forces insurers to analyse the risks they run across their business and determine the level of capital they need to hold. Risk models lie at the heart of the rules and enable insurers to calculate capital requirements in line with the level of risk they are taking,” said Rick Lester, lead Solvency II partner at Deloitte.

“Insurers use internal models if they believe they are a better reflection of their risk profile than standard models. There is a cost to adopting them, but there are also potential benefits because they can give a better understanding of risk, which should enable better business decisions and may ultimately lead to lower capital requirements.”