Moore Stephens: Insurance Business Models May Fall Short of Solvency II Requirements

Leading accountant and consultant Moore Stephens has warned that some existing internal business models in the UK insurance industry may not meet the standard required under Solvency II, the EU project to create a system of risk-based prudential regulation in the insurance sector.

March 12, 2009: Simon Gallagher, head of the Moore Stephens Industry Group, says, “Insurers face a variety of challenges in achieving Solvency II compliance, some of them entirely new to the industry. But the biggest challenge is likely to revolve around the development of compliant internal capital models, or the customisation of existing models and – most importantly – the embedding of those models into day-to-day business practices.”

Writing in the Moore Stephens newsletter Insured Interest, Gallagher explains, “Many companies in the insurance sector already have internal business models, but the empirical evidence to date suggests that these are generally not of the standard which will be required under Solvency II. Internal models must be embedded into the structure of everyday operations, and must be capable of anticipating changes in the industry or in the financial markets, or at least reacting to change – as, for example, in the case of the current credit crunch – quickly enough to protect the business.”

Gallagher concludes, “Firms need to submit details of their proposed approach to capital modelling to the FSA by June 2009, failing which they will be required to use the Directive’s formulaic approach, which can be expected to be more onerous and less flexible than any independently developed model. To do that, they are likely to need access to independent actuarial skills and the technical expertise necessary to build and adapt internal models to the required regulatory level, and to provide third-party validation of existing systems. This in turn has serious implications for meeting the overall Solvency II compliance deadline of October 2012.”

?Elsewhere in Insured Interest, Moore Stephens consultant Claire Crossley explains that regulation governing the UK insurance industry is likely to become increasingly stringent and to demand properly embedded risk control procedures. She says, “Regulation alone cannot remove financial risk from the business of insurance. But the upward trend in FSA fines would seem to confirm the need for regulatory control, and regulatory intervention is likely to increase in the sort of depressed economic climate in which today’s insurers and their customers are operating.

“The challenge for today’s insurance industry, and for today’s regulators, is to achieve the right balance between necessary financial regulation and establishing within businesses a recognition of the need to embed proper risk management and governance principles into their culture. This cannot be achieved through the sort of tick-box mentality which has been adopted by some sectors of the industry as their response to the need to demonstrate regulatory compliance.”

• About Moore Stephens:

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as an adviser and consultant to the insurance sector. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 647 offices of independent member firms in 98 countries employing 21,224 people. Fee income increased in 2008 by US$353 million to US$2,237 million, a growth rate of 18.7%.

For more Information: Simon Gallagher, Moore Stephens LLP / Tel: +44 (0)7881 500016 / email: [email protected]