Internal models

European Solvency II survey

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Many insurers believe that developing models that are a better fit for their businesses will produce lower capital requirements.

Many companies do not consider the standard formula fully representative of their risk profile.

Our findings show that 19% of insurers are implementing full internal models, and 30% partial internal models. These high ratios reflect the weighting of our survey toward larger insurance companies that have the resources to design, build, validate and embed such models.

In some countries, a clear majority of companies have decided not to implement an internal model. These include Greece (70%), Germany (63%) and the Netherlands (69%). Internal model development is higher in the UK (62%), Poland (67%) and Spain (60%), perhaps reflecting an ultimate goal of implementing these models at a later date. For internal model users, 52% plan to have their model approved by the supervisory authorities from the Solvency II “go live” date. German and French insurance companies expect to wait at least two years.

More than 70% of European insurers consider the standard formula capital requirements for non-life underwriting risk to be exaggerated. The general view that the standard formula Solvency Capital Requirement (SCR) does not accurately reflect their risk profile is consistent with high ratios of companies implementing (partial) internal models. Many insurers believe that developing models that are a better fit for their businesses will produce lower capital requirements. On average, companies expect that the internal model SCR will be 16% lower; and 26% expect the SCR to decrease by 20%-30%.

Major differences in readiness of internal models highlight the work ahead. UK, Spanish and French companies assessed their readiness at a level above the European average. In contrast, Greek, Polish, Italian and German companies were less advanced. UK insurers considered that they met most requirements, while Greek insurers had yet to meet any. The greatest need for improvement – and the highest discrepancy in readiness levels – was in profit and loss attribution, where the UK met 70% of requirements. Polish (50%) and Greek insurers (100%) said they had not met any requirements in this area.

Readiness for internal model requirements in country comparison

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