QIS5: Solvency II implementation testing at a higher level
CEIOPS launches QIS5
The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) launched its latest Quantitative Impact Study (QIS5) on 6 July 2010. This fifth impact study is scheduled to be fully operational by early August 2010, with the release of the Standard Formula Model spreadsheets by the European Commission (EC). Completed submissions are due by 31 October 2010. For insurance and reinsurance groups the deadline is 15 November 2010.
QIS5 impact on Solvency II
QIS5 is the fifth in a line of quantitative impact studies being used to develop the Standard Formula, which will be used to determine the Solvency Capital Requirement (SCR) for all EU insurers not using an approved Internal Model. Although Solvency II is not scheduled to come into effect until 31 December 2012, it is essential to begin the planning as soon as possible.
All insurers are strongly encouraged to participate in this exercise, as it will assist them in determining the likely impact of Solvency II on their capital requirements. In some locations, e.g., in the UK, the regulator has indicated that all firms that intend to apply to use an internal model must take part in QIS5.
Benefits of participating in QIS5
Performing QIS5 will enable you to:
- Form the most up-to-date view of the likely impact of Solvency II on your capital requirements
- Identify key issues which require prioritized attention for further development, e.g., identify methodology and systems implications while there is enough time to address them
- Obtain more accurate estimates of implementation costs and resource requirements
- Test the completeness and appropriateness of the processes, data and systems you plan to use to calculate your SCR
- Educate stakeholders with quantitative evidence of the potential impacts to inform lobbying activities
- Assess how current capabilities can meet the requirements on a “robust” rather than “best endeavors” basis
EY can assist with all aspects of the QIS5 preparation, implementation and submission as well as independent assurance. We will tailor our support to your requirements, including these options:
- Preparation – We can assist by planning the activity for performing QIS5 as well as developing implementation guidelines and interpretation documents. We can also help you to conduct the exercise by running a training workshop to get your wider team up to speed on the workings of QIS5.
- Implementation – We can provide technical resources to assist your teams with the completion of QIS5, especially on areas which may be technically challenging or subject to interpretation. Specifically, we can assist with validation, analysis, consolidation and interpretation of results and identification of key issues.
- Independent quality assurance – We can provide assurance on your QIS5 process and controls, data, methodology, models, assumptions and results. This will give you comfort over the results produced and the methodology and approximation adopted.
Our work will also strengthen your response for internal model application. You will also have access to our market knowledge of QIS5, as experienced by other insurers and as developments occur.
QIS5 focus areas
There are a number of changes in the final QIS5 specification that will require attention:
- Own funds
- Revisions to own funds, including the treatment of expected profits included in future premiums (EPIFP), grandfathering rules and components of Tier 3 capital
- Technical provisions
- Changes to the level and application of the allowance for illiquidity premium used in the discount rate with the introduction of a 75% bucket and all business receiving at least a 50% illiquidity premium
- Restrictions to the level of diversification benefit that can be assumed within the risk margin calculation; additionally, the discount rate excludes the illiquidity premium
- Several revised calibrations to the level of the stresses, the correlations both within and between risk modules, as well as structural changes to the SCR. (For example, the longevity stress reduction from 25% to 20%, health underwriting correlation assumptions and removal of equity and interest rate volatility shocks.)
In addition, while you will need to cover all aspects of the QIS5 requirements, some of the elements of the calculation may not yet have received sufficient attention. These might include tax modeling (to support the quantification of the loss absorbency of deferred taxes), quantification of standardized catastrophe scenarios and assessment of the impact and treatment of contract boundaries.
Getting an early start
Although QIS5 will officially start in August 2010, a significant part of the process relates to collating the data, with sufficient granularity to support the calculations. Also, QIS5 represents a move away from the “best endeavors” approach adopted in previous QIS exercises, with insurers encouraged to develop the processes to meet the high data quality and control process required under Solvency II.
With the release of the QIS5 Technical Specifications, it is possible to get an early start in your prep-arations through training, production of template calculation tools (e.g., risk margin) and production of results consolidation templates. There are many aspects of the market consistent balance sheet that can already be produced (e.g., asset values). We can work with you now to identify those aspects of QIS5 that can be accelerated, helping to relieve pressures created by interim reporting and staff vacation.
EY has extensive national and international experience on Solvency II, with clients ranging from large cross-border insurance groups to medium sized local insurers. Our pan-European practice allows direct insight into market practices across the continent.
Our approaches have been used to assist a number of insurers across Europe with their QIS4 (and subsequent) exercises and the approaches have proven to be effective.
- We have been engaged in more than 25 QIS4 specific projects for submission to the regulator across Europe
- We have completed numerous QIS4 exercises for European and Global entities as part of Solvency II preparation projects.