Deloitte comments on the final QIS5 specification released by the European Commission yesterday

Tamsin Abbey, life insurance partner at Deloitte commented:

“The final QIS5 specification released today contains changes under 13 headings covering the entire spectrum of the Solvency II balance sheet and capital requirements. It appears that the Commission has listened to the industry's concerns on previous calibrations. Overall both life and non-life firms have hit the back of the net with their efforts with the Commission, with there being something for everyone to cheer about compared to previous specifications. However, insurers need to swing into action now and participate fully if they are to win all of their battles.

“The big unknown is how the results of QIS5 will play out in practice and how these will then set the standing of UK and European firms on the international stage."

Key changes in today’s QIS5 paper include further amendments to the liquidity premium allowance in the discounting of technical provisions. The 0%, 50% and 100% bands have now been changed to remove the 0% group but add in a 75% intermediate group for business that has profit participation. While this will appeal to many life firms, non-life firms may find it to be an administrative headache.

Alex Marcuson, non-life insurance partner at Deloitte commented:

"Many non-life firms will see a minimal reduction to their liabilities in return for a very considerable increase in process complexity, coupled with a new source of balance sheet volatility. Numerous non-life firms do not hold many non-government bonds, so this is a risk that management may be relatively unfamiliar with.”
On the other side of the balance sheet, the grouping of some types of own funds has been amended, with deferred tax assets being downgraded to tier 3, but certain grandfathered funds being eligible for consideration as tier 1 and 2.

Tamsin Abbey continued:

“While there are ups and downs on the capital calculation, the general impression is that the requirements have been softened. In finalising their advice the Commission will analyse the results of QIS5 in detail, together with the Impact Assessment of the Level 2 options, incorporating the analysis carried out by Deloitte for the Commission. Notable items in the capital requirements include the allowance for rolling hedge programmes and the Solvency II economic approach taken to local statutory or regulatory funds (such as equalisation provisions for non-life firms), which can now be treated as fully fungible within the group. This will potentially reduce capital requirements by allowing diversification across large international groups, although this is tempered by the removal of allowance for diversification between entities within the group risk margin calculation.”

About Deloitte

Deloitte has a dedicated Solvency II team comprised of more than 50 partners and directors throughout Europe. Members of the team are drawn from across the firm’s actuarial, risk and regulatory advisory, corporate finance, technology and tax teams providing the breadth and skills required to understand the challenges and opportunities associated with Solvency II.