Solvency II capital requirements increase by 62%

UK non-life insurers face an average solvency capital requirement (SCR) increase of 62% compared to the Solvency II QIS4 standard formula level, as a result of changes proposed to the implementation measures for the European regulatory standard over the past six months.

This equates, on a conservative basis, to an additional €15 billion of capital that insurers across the non-life industry will have to find.

Analysis carried out by EMB, the international actuarial and business consultancy, on data supplied by 49 entities with a QIS4 capitalisation of €8 billion shows an average 55% increase for personal lines firms, 61% for commercial lines, and 66% for London Market firms.

The levels of increase for individual entities range from 10% up to a daunting 120%. P&I Clubs will be hit particularly hard if the Solvency II standard formula calculations remain in their current form with an average 92% increase across the entities surveyed.

EMB Partner, Raj Ahuja, commented: “Apart from the scale of the increases, what we have also noticed from this piece of work is that size doesn’t matter in this case – larger firms are affected just as much as smaller ones.”

EMB’s analysis was unable to include all the updates to the standard formula implied by the CEIOPS papers but focused on those that it considered were likely to be more material to the overall result and where direct comparisons could be made.

By far the biggest impact it found arose from the changes in the calibrations of non-life premium and reserve risk which, in some cases, have been doubled. These account for 43% of the overall capital uplift.

The removal of geographic diversification benefits adds a further 5% to the capital requirement. This is a particular issue for many smaller UK companies, many of whom, unlike the majority of their European peers, write international business. The reduction in capital diversification on catastrophe and non-catastrophe risk exposures contributes a further 5% to the uplift. Increases in the operational risk allowance, as a result of a doubling of the factors in the formulae, also add a further 5% to the overall result.

“The levels of capital increases we’ve found will we expect come as quite a shock to many insurers,” said Ahuja. “Certainly they need to think about the implications for their own Solvency II plans, including the alternative of using an internal model, and how they can feed in to the continuing consultation process. We would strongly advise firms to verify the impacts by taking part in QIS5 later in the year.”

Of the 49 firms participating in the study, 17 had a QIS4 capitalisation of under €50 million, 23 between €50 million and €250 million, and nine in excess of €250 million. The participants were split roughly two thirds and one third between London Market and commercial and personal lines providers.

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