Insurance business models may fall short of Solvency II requirements

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Leading accountant and consultant Moore Stephens has warned that some existing internal business models in the UK insurance industry may not meet the standard required under Solvency II, the EU project to create a system of risk-based prudential regulation in the insurance sector.

Simon Gallagher, head of the Moore Stephens Industry Group, says, “Insurers face a variety of challenges in achieving Solvency II compliance, some of them entirely new to the industry. But the biggest challenge is likely to revolve around the development of compliant internal capital models, or the customisation of existing models and – most importantly – the embedding of those models into day-to-day business practices.”

Writing in the Moore Stephens newsletter Insured Interest, Gallagher explains, “Many companies in the insurance sector already have internal business models, but the empirical evidence to date suggests that these are generally not of the standard which will be required under Solvency II. Internal models must be embedded into the structure of everyday operations, and must be capable of anticipating changes in the industry or in the financial markets, or at least reacting to change – as, for example, in the case of the current credit crunch – quickly enough to protect the business.”

Gallagher concludes, “Firms need to submit details of their proposed approach to capital modelling to the FSA by June 2009, failing which they will be required to use the Directive’s formulaic approach, which can be expected to be more onerous and less flexible than any independently developed model. To do that, they are likely to need access to independent actuarial skills and the technical expertise necessary to build and adapt internal models to the required regulatory level, and to provide third-party validation of existing systems. This in turn has serious implications for meeting the overall Solvency II compliance deadline of October 2012.”

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