Maltese insurance companies understand the need to gear up for Solvency II and have in fact initiated Solvency II projects, according to the results of a KPMG survey on the state of readiness of the Maltese insurance sector for this new European regulation.
The Solvency II regulation for insurance companies, which comes into force in 2013, will determine how insurance companies are managed and run in the future.
“Solvency II is considered to be a source of much regulatory change for insurance companies, much like Basel II was for banks and both regulators and the regulated are seeking to make sure they get it right – they don’t want to get caught out,” said Juanita Bencini, partner in charge of risk and compliance services at KPMG in Malta, whose team was responsible for conducting the survey.
“We have seen some interesting and meaningful numbers coming through, which shed light on how the Maltese insurance market – which is a unique market – is addressing Solvency II,” said Josianne Briffa, senior manager and key insurance regulatory contact at KPMG.
Ninety four per cent of the survey respondents said they nominated an individual within the organisation to manage their Solvency II project and in most cases this responsibility vests in the chief finance officer. However, many companies were quick to point out that the project would not be a one-man effort, but rather would reflect the effort of all the functions within the organisation.
“Our view is that we should expect more functions within the insurance company to jump on board the train as projects progress towards integration and embedding phases,” said Ms Bencini.
Until now, the industry is utilising its internal resources to run the projects and 97 per cent of respondents said they do not see the need to have a dedicated resource working only on the Solvency II project.
“Such an approach may have its merits because solutions developed by staff sitting within the business are likely to be more aligned with the business needs. However there is a potential drawback in that the same individuals are expected to juggle between their Solvency II work and existing responsibilities, which could result in the Solvency II project taking a backseat to the more pressing daily demands,” KPMG said.
Over 80 per cent of those interviewed stated that they have external resources involved in their Solvency II project, “which is not surprising given that the Maltese insurance market is dominated by companies which are managed by third party licensed insurance managers,” according to KPMG.
Only 26 per cent of respondent firms have approved business cases and only nine per cent have budgets approved for Solvency II projects.
“KPMG’s view is that establishing the business case for Solvency II and tying this to a proper budgeting process tends to focus the mind and this automatically leads to a better understanding of the requirements of Solvency II. In this respect therefore the exercise is highly advisable. Most respondents have lamented the fact that actuarial expertise is lacking in the local market and they consider this to be one of the external resources that insurance companies will need going forward,” the survey pointed out.
The survey also found out that the board of directors may not always be the driver for change to meet the Solvency II requirements but is always involved in the Solvency II project. A respondent also commented that the board is finding it a challenge to understand the requirements of Solvency II because there is not sufficient expertise at board level.
All participants claimed they have participated in Quantitative Impact Study 5 (QIS5) run by CEIOPS and that most are looking at QIS5 as an exercise which will help them assess closely the implications of Solvency II on their capital requirements.
Since the Survey was conducted when companies were going through their QIS5 exercises, it is not surprising to find that 59 per cent of respondents do not expect a reduction in their capital requirements as a result of their Solvency II project. Respondents do however see the project as a strong contributor to improved data quality (68 per cent), improved capital management (79 per cent) and improved management of risks (88 per cent).
When asked whether they would be implementing a mathematical model to accurately measure their risks, 29 per cent of those surveyed said that they plan, even at the outset, to adopt a partial or full internal model to model risks and calculate their capital requirements.
“This is in sharp contrast to how the banking sector had approached Basel II,” said Ms Bencini. “Then, no bank in Malta started off with an internal model to calculate its capital requirements although quite a few banks have today made the transition. It reflects a maturing of the market and an understanding that regulation, although expensive, may be utilised to drive improvements in an organisation.”
The KPMG survey was carried out in the autumn of 2010 and included a total of 34 companies. The survey was carried out by means of a questionnaire which was then followed up by a short interview with the person responsible for completing the survey.
The full survey can be downloaded from KPMG Malta’s website at www.kpmg.com.mt