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Finanstilsynet, the Danish Financial Supervisory Authority (FSA), is consulting on proposals to introduce a standard formula for calculating regulatory capital requirements in order to reduce inconsistencies between companies and ensure an equal level of policyholder protection.
The changes will mean that firms that had previously calculated their solvency requirements with a confidence level lower than 99.5 per cent are likely to have to increase their capital buffers. Insurers that already meet the standard for calculating Solvency II's solvency capital requirement may also need to increase their regulatory capital.
The draft proposals come after the Danish supervisor expressed concerns about wide differences in the calibrations of insurers' capital models. Denmark had previously put in place a risk-based framework ahead of Solvency II, but insurers were given the flexibility to decide on the size of the shocks they use to calculate their solvency requirements in order to reflect better their risk profile.
The importance of simplifying the requirements for calculating counterparty risk and storm concentration risk has been highlighted by other experts. In the case of storm concentration risk, under the FSA's proposals, insurers will be allowed to use more homogenous risk zones than the Catastrophe Risk Evaluation and Standardizing Target Accumulations (Cresta) zones, which are required under Solvency II.
Jesper Dan Jespersen, partner at the insurance practice at KPMG in Copenhagen, says that there were concerns that the introduction of national twists could introduce hurdles to insurers operating cross-borders in the Nordic region. But he notes that in the final version of the draft the supervisor allows insurers to opt out of the simplifications, thus ensuring consistency with Solvency II risks.
Members of the Danish Insurance Association will meet in the coming weeks to discuss a formal response to the proposals. The association has previously expressed concerns about the implementation timeframe, arguing that implementing all the changes as of January 1, 2014 is an "ambitious timeframe".
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