The European Insurance and Occupational Pensions Authority (EIOPA) today announced the results of the fifth Quantitative Impact Study (QIS5). EIOPA ran QIS5 to assess the practicability, implications and impact of specified approaches to (re)insurers’ valuation of assets and liabilities, as well as capital setting under Solvency II, the new insurance directive that becomes effective on 1 January 2013. Under Solvency II, capital requirements will be determined on the basis of the risk profile of insurance companies and the way companies manage such risks.

QIS5 was the most comprehensive exercise to assess the impact of some key aspects and was executed upon request of the European Commission. Participation of insurers in the exercise increased considerably, compared to the fourth Quantitative Impact Study that was conducted in 2008. Almost 70% of all insurance and reinsurance companies under the scope of the Solvency II directive participated in QIS5, up from the 33% who participated in QIS4. Additionally, 167 insurance and reinsurance groups participated, up from 111 under QIS4.

Solvency II introduces two levels of capital requirements: the minimum and the Solvency Capital Requirement. If a company misses the Minimum Capital Requirement (MCR), ultimate supervisory action will be triggered. If the SCR threshold is missed, the respective supervisory authority will determine supervisory responses linked to the concrete situation of the firm.

Overall, QIS5 showed that the financial position of the European insurance and reinsurance sector assessed against the Solvency Capital Requirements (SCR) of the Solvency II directive remains sound. Currently, insurance companies who participated in QIS5 hold €395 billion of excess capital to meet their solvency capital requirements (SCR), and excess capital of €676 billion to meet their minimum capital requirement (MCR), as defined in the Solvency II directive. This confirms the strong position of the European insurance sector since the capital surplus was reached despite a difficult market situation. These challenging market conditions, mainly due to decreasing asset values as a result of the impact of the financial crisis, resulted in a lower surplus under the still applicable Solvency I rules.

For insurance and reinsurance groups, QIS5 resulted in a reduction of their capital surplus. Compared to the calculation under Solvency I standards, insurance groups have €86 billion less surplus capital available, which is a reduction of 44%. However, the QIS5 exercise demonstrated that this effect would be largely absorbed if insurance groups apply internal models and transitional measures to calculate the capital requirements under Solvency II. This would limit the reduction of the surplus to €3 billion, which represents roughly 1%.

QIS5 also examined calibrations within Solvency II. QIS5 shows that, while the calibrations in the system are in general accepted as appropriate, EIOPA is already performing additional work, in particular in the areas of Non Life and CAT modules to improve these calibrations.

EIOPA stresses that the different requirements and design of Solvency I compared to Solvency II have to be considered, and so does the diversity of the European insurance sector. The difference is characterised by an increase in capital requirements, a decrease in technical provisions and a relative increase in the amount of own funds that are allowed to be used to meet the capital requirements.

QIS5 also aimed at encouraging insurance companies and supervisors to prepare for the introduction of Solvency II. By collecting comments on the practicability of the exercise, EIOPA was able to identify areas where further guidance seems necessary or where the feasibility and complexity of the proposals should be addressed in order to ensure proper implementation by all undertakings, in particular small and medium undertakings. Some examples are the design of the non-life and health catastrophe risk sub-modules, the definition of contract boundaries and related valuation of deferred taxes and expected profits in future premium.

QIS5 also revealed other important areas, which were not tested in this quantitative exercise but require further attention of the industry in preparing for Solvency II. These areas are governance, risk management and reporting requirements.

Press release