European Insurers Expect Modest Cost for Solvency II Compliance, Accenture Survey Finds
3 percent expect compliance to cost them less than €5 million
Nearly all expect compliance to increase stakeholder confidence in risk control and management
LONDON.– More than three-quarters of large European insurers expect to spend less than €25 million through 2012 on Solvency II compliance, with more than half of those expecting to spend less than €5 million, according to results of a survey released today by Accenture (NYSE: ACN). Specifically, one-third of the insurers surveyed said they expect to spend between €5 million and €25 million on such compliance, with an even greater amount – 43 percent – saying they expect to spend less than €5 million.
The European Union’s Solvency II directive calls for a common set of solvency regulations for insurers across Europe by 2012, including the enactment of new rules regarding the levels of capital that EU insurers must set aside to cover their combined risks and liabilities.
Considering Solvency II in the larger context of strengthening their enterprise, three-quarters (75 percent) of respondents said they believe that their compliance investment will support their business needs. More specifically, 94 percent said they believe it will increase stakeholders’ confidence in risk control and management, 88 percent said they expect it to increase stakeholders’ confidence in the insurers’ capital reserves, and 85 percent said they expect it to provide enhanced capital management.
“Insurers expect to spend far less to comply with Solvency II than banks expected to spend to comply with Basel II requirements,” said Eva Dewor, a senior executive in Accenture’s Insurance practice. “While achieving Solvency II compliance with the lowest cost possible might be an acceptable strategy for some insurers, they should be aware that a compliance-only approach, without the necessary investment in risk management for certain core business processes, won’t enable them to reap the benefits they expect or to anticipate crisis situations.”
Another key finding of the survey: Less than 20 percent of the insurers surveyed said they consider themselves well prepared for the start of Solvency II. Processes, IT systems and risk quantification and modeling capabilities are the areas where they see the most significant need for improvement.
The survey also found that insurers believe that many of their core risk-management capabilities need to be enhanced. The core capabilities where respondents identified the most significant need for improvement were risk-based product pricing (cited by 89 percent of respondents), the integration of risk management and governance into decision-making processes (80 percent), underwriting portfolio management (71 percent), asset and liability management (70 percent), and asset portfolio management capabilities (63 percent).
In addition, while the vast majority (93 percent) of respondents said they believe that Solvency II will increase the importance of risk-management capabilities, a significant number said that their organization needs to enhance their risk infrastructure in order to better identify, assess, quantify and monitor risks. Specifically, 86 percent of respondents said that their organization’s risk culture and quantitative risk management needed to be improved, and 79 percent said that their risk control capability and embedded risk management needed to be improved.
“European insurers believe that Solvency II will give them a competitive edge, but our findings indicate that many companies still don’t have the necessary risk-management basics,” said Dewor. “To take advantage of Solvency II, insurers must better integrate risk management and governance into their decision-making processes while improving their portfolio-optimization and pricing capabilities.”
Among the survey’s other key findings:
· Positive impact expected. Nearly all (98 percent) of the insurers surveyed said they expect Solvency II to have an overall positive impact on the insurance industry, and 95 percent said they expect a positive impact on their company.
· An increasing mobilization for Solvency II. Nine in 10 (89 percent) of the insurers surveyed said they have participated in the third Solvency II quantitative impact study (QIS 3), compared with 73 percent who said they participated in the second impact study (QIS 2) and 50 percent who said they participated in the first impact study (QIS 1). This shows that the European Insurance industry is increasingly involved in the consultation process that the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has initiated to test the impact of the Solvency II directive.
· An increasing number of insurers are moving swiftly in preparation for Solvency II. Although the date of final text of the directive has been revised and is now expected in 2010 with implementation not likely until 2012, two-thirds (66 percent) of the insurers surveyed said they have already enacted formal programs to plan and mobilize for Solvency II, compared with only 49 percent of respondents in a similar survey Accenture conducted in 2006.
· Internal models are preferred. The vast majority (93 percent) of the insurers said they plan to use their own internal models instead of the standard formulas provided by the Solvency II regulators for calculating their solvency capital requirements.
· Lack of resources is a key issue. When asked why they have not participated in all of the QIS, the most-cited answer was the lack of resources, mentioned by 70 percent of respondents. For insurers that have participated in at least two of the QIS, the second-most-cited answer was also the lack of resources, mentioned by 46 percent of respondents.
· A wave of merger and acquisition activity is expected. More than four-fifths (84 percent) of respondents said they expect the implementation of Solvency II to increase consolidation in the insurance industry.
· Small insurance companies will suffer the most. Four in five respondents (82 percent) said they foresee small insurers as the likely losers from the Solvency II directive, while the same number (82 percent) said they believe large companies will be among the winners.
To assess European insurance firms’ response to Solvency II, Accenture surveyed 44 large European insurance firms, predominantly life and property & casualty insurers, in September and October 2007. Roughly two-thirds of the life insurance companies reported gross annual premiums of more than €1 billion, and three-quarters of P&C insurers reported premium income of more than €1 billion. Of the 44 insurers surveyed, 10 are based in each of the United Kingdom, Germany and France; four are based in each of Spain and Italy; three are based in Sweden; and one is based in each of Finland, Norway and Denmark.
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