2009-11-03

By Editor, CIR

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recommended substantial further strengthening of capital requirements for insurers, according to Watson Wyatt, following the publication yesterday of the body's third round draft advice on the rules for Solvency II.

This advice contains more detail on the way in which the capital requirements for insurers will be determined in future -- the impact of which could be significant on insurers, says Watson Wyatt. Global head of risk and value at the firm, Mark Chaplin, commented: "Following the tightening in standards that we saw in the second round of advice during the summer this is no surprise, particularly given CEIOPS' comments in its March paper on the lessons to be learned from the financial crisis."

According to the firm, market events during the past two years have had a direct influence on the stresses applied to shares, property and corporate bonds and to the assumptions about diversification of risk. The latter change is estimated by CEIOPS to lead to a 25 per cent increase in previous estimations of the capital requirements for the whole EU insurance industry, with life insurers and reinsurers being worst affected.

Graham Fulcher, UK head of non-life insurance at Watson Wyatt warned: "Reduced recognition by CEIOPS of risk reduction through diversification and increased market risk and non-life insurance risk capital requirements may prompt more insurers to consider applying for approval to use an internal model. However, there is a significant danger that these tougher calibrations will put upward pressure on internal model assumptions."

According to the firm, CEIOPS' most recent proposals indicate how the equity stress test will be reduced following market falls and how, in times of systemic crisis, insurers may be allowed longer to restore their capital levels.

Mark Chaplin added: "These are sensible measures to reduce the chance of a downward spiral in equity and corporate bond markets. However, some other elements of proposals such as the interest rate volatility stress could add instability."

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