As European insurers continue their Solvency II preparations, many are changing their approach to calculating capital adequacy requirements, according to Deloitte.
A survey conducted by the Economist Intelligence Unit on behalf of Deloitte found that 51 per cent of respondents plan to change their approach to calculating regulatory capital. Of those, 60 per cent have increased the sophistication of their approach.
Of those who are changing their approach, 37 per cent are switching from a partial internal model to a full internal model, and 23 per cent have moved away from the standard formula.
Insurers use risk models to calculate capital adequacy requirements, and under the Solvency II rules scheduled to be implemented in January 2014 insurers can adopt an internal model (full or partial) or standard formula.
Internal models may be more expensive than the standard formula to implement and run, but they can give insurers a clearer picture of their risk and reduce their capital requirements.
Last year's survey found that half of respondents had decided on a full internal model to calculate capital adequacy requirements, 30 per cent a partial internal model, and 20 per cent a standard formula.
Rick Lester, lead Solvency II partner at Deloitte, said: "Insurers use internal models if they believe they are a better reflection of their risk profile than standard models. "There is a cost to adopting them, but there are also potential benefits because they can give a better understanding of risk, which should enable better business decisions and may ultimately lead to lower capital requirements."
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