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Jul102014

The potential impact of Solvency II

The Potential Implications

of Solvency II

 

Solvency II will have far-reaching consequences not only for insurers but also for the capital market.

Insurers, pension funds, and consultants have been anticipating the implementation of Solvency II for some time. In brief, Solvency II demands a more comprehensive risk management framework and higher capital requirements for European insurers.

The introduction of Solvency II, initially planned for January 2013 but likely to be delayed, is intended to make insurers more stable and protect policyholders. Insurers taking on greater risks will also be required to hold more capital. The implementation will have significant repercussions for insurers, necessitating substantial changes. UK regulators estimate that the costs of implementation in the UK alone will exceed £2 billion, with an additional £250 million annually for compliance costs for insurers.

Major insurers welcome the increased investment and attention to risk management activities. However, smaller insurers may struggle to meet the capital requirements and stricter risk management standards. Consequently, a BASIC version of the directive has been introduced. The question remains as to how the regulator will handle this.

There is also criticism of the stricter requirements, particularly regarding who will bear the costs of this transition—will it be the policyholders?

The portfolios of insurers will change, with the new rules discouraging risky investments such as equities and private equity. With the current low-interest rates, there is uncertainty about whether sufficient income can be generated in the future. Banks will also be affected by the stricter requirements, as they are significant investors in insurers.

If the business and risk models of insurers show strong similarities, there could be simultaneous buying and selling of stocks, potentially leading to significant market fluctuations, according to a major European insurer.

Additionally, the competitive position relative to other countries may deteriorate, especially if the United States does not implement similar measures to Solvency II, as noted by another major European insurer. However, an insurance market characterised by great stability and certainty, partly due to Solvency II, could also derive competitive advantage from this development.

Jul102014

COSO due for renewal

COSO due for renewal


The widely adopted COSO (Committee of Sponsoring Organizations of the Treadway Commission) risk framework, frequently utilized in the implementation and auditing of standards such as ISAE 3402 or ISO 27001, is due for a comprehensive update.

ICIF – the new model

Due to strong market changes, the COSO II ERM framework was outdated. A framework was needed that was responsive to, and took into account, current market conditions while being flexible enough to be applicable to a wide range of organisations: Internal Control – Integrated Framework (ICIF). The framework is also expected to enable organisations to meet rapidly changing market demands without incurring more risk.

The biggest changes are the minimisation of the COSO cube (the number of components has been reduced). In addition, the model has moved to a ‘principle-based structre’ where 17 principles form the foundation for the model. Also, given recent developments, the new model has placed more emphasis on the IT component.

From late 2011 to March 2012, the committee solicited feedback from the market on the framework. This feedback is currently being critically assessed by the committee and will largely be incorporated into the final version of the framework.

Men walking to the office with a laptop bag, he is a SOC 2 consultant
Jul102014

Solvency II, too bureaucratic?

Solvency II, too bureaucratic?

Paul Tucker, Deputy Governor of the Bank of England, recently described the Solvency II directive in an interview as overly complicated and expensive. Tucker indicated that the Solvency II directive might contribute to financial instability rather than provide greater security.

According to Tucker, the main issues are the high costs associated with implementing the new directive and its complexity.

“At the Bank of England, we are astonished by the resources required for us and the market as a whole to get up to speed with Solvency II by early 2014,” said Tucker. “We are also concerned that implementing a risk-sensitive regime makes the directive too complicated, similar to Basel II for banks.”

“We must prevent regulatory bodies from ‘drowning’ in the data provided by insurers and being unable to handle this data flow. This could result in regulators overlooking significant risks,” he added.

This concern resonates with many in the insurance market, who have been warning about these issues for some time.

The new directive is considered the most significant change in this area in Europe. Potential plans to extend the directive to pension funds could cost British businesses around £600 billion, according to research by JPMorgan Asset Management. JPMorgan stated that it would be nearly impossible for some pension funds to maintain the required amount of capital.

Mr Tucker’s speech coincides with rumours that Britain’s largest insurer may relocate its headquarters to Hong Kong due to the proposed measures.

Tucker stated that insurers, like banks, “must be able to fail calmly, in a controlled, orderly manner.” If the international community removes the safety net, bondholders will be exposed to risks from such failures.

“Insurers are significant investors in securities and other financial instruments. In the near future, you will no longer be protected by an implicit state guarantee for those investments,” Tucker concluded.

Jul92014

Control Reports

Control Reports


Due to current developments in outsourcing and the associated risk management, SASconsult has developed an implementation model that enables a cost-efficient ISAE 3402 implementation. This model (the SAS | Modeller) is delivered in a web tool that includes the process flows. The result is that the processes and controls required under ISAE 3402 are visible to everyone (via, for example, the intranet). We have already successfully implemented the SAS | Modeller at various property managers, IT organisations, and other financial institutions. For more information about the SAS | Modeller and its possibilities for your organisation, please refer to SAS | Modeller.