Solvency II can bring business value to insurance companies

Insurance companies in Europe are at present fully engaged in preparing for the Solvency II rules that will be implemented in 2012. Since 2007, non-life insurance company If has been adapting its operation to the new regulations. The goal is to use the new EU solvency regulations to bring additional value to the company.

Karin Friberg, Chief Risk Officer at If, is positive to Solvency II. The basic principle of the legislation is to make sure that each insurance company has sufficient capital to cover its exposure to risk.

– It is a good idea to link risk exposure to capital. To us, this will mean a more effective use of our capital, a larger focus on risk management and it will allow us to work in a more structured manner, she says.

Understanding the suggested rules of the new system is a very time-consuming process. Two thirds of the 30 people in the risk management division at If are working intensively on the Solvency project. In addition, actuaries, analysts and other members of the organization – as well as some consultants –are involved in the work.

– The fact that the regulations are constantly being further developed constitutes a major challenge, meaning that the parameters change. The scope of the regulations became broader in the wake of the financial crisis; now the demands are a little bit less stringent and more realistic. Hundreds of pages of new directives have arrived in recent months, which we must consider and respond to, explains Karin Friberg.

– We have a well-functioning structure and have already completed quite a few milestones. The novelty is that risk will be governed on somewhat different parameters than previously, and everything will be documented.

Solvency II requires new test functions, special quantitative data and work methods which means a prolonged procedure. It may sometimes be difficult to justify changes to things that are already working.

How will Solvency II affect the company's organization, procedures and competence?
– The organization will not be affected much. A few more people than before will work with risk management, control and compliance. There will also be more attention to assessment, control and reporting in our various operations, says Karin Friberg.

– We are introducing some new procedures, for example a process for Self-Assessment, which will allow company units to evaluate and report operative risks. In terms of competency, additional training on a continuous basis will of course be necessary, related to for instance the new Conceptual Apparatus.

How do you feel that the regulations will affect premium levels and the product portfolio?
– In the end it can affect the setting of premiums. A larger risk will require more restricted capital. When the new procedures are in place, it will be easier to establish correct premium levels in which capital costs are reflected, says Karin Friberg. However, it is unlikely that the product portfolio will be noticeably affected by the new rules.

If Insurance is collecting information relating to risks in a data layer during this year and will be implementing all of the new procedures. If uses a common manual throughout the group, which to a large extent is constructed in harmony with the new rules. However, new ways of storing information and making calculations will be necessary. The ambition is not only to comply fully with the new regulations but to do so in a manner which adds value and benefits the operation.

– In order to better adapt Solvency II to our operations, we intend to apply for permission to use a partial internal model for calculating solvency capital requirements, which would otherwise be calculated by the standard model.

Karin Friberg is continuously following the ongoing development of the new regulations. If Insurance has participated in all four of the Quantitative Impact Studies (QIS), in which The Swedish Financial Supervisory Authority has asked the large insurance companies to complete in order to test how their operations would be impacted by the regulatory framework.

– They have been useful for increasing our understanding of the implications of Solvency II. We have now established a database where we can access aggregated and integrated information. The impact studies have provided us with a deeper insight into the regulations and have helped us develop better tools and to make adjustments to our staff, says Karin.

Specifications for the fifth QIS recently arrived and will be performed during Fall 2010. QIS 5 will be more complete and, according to Karin Friberg, will provide a clearer picture of the impact of the new regulations.

– Our focus in the near future will of course be to complete the process and to obtain an approved internal model for meeting the solvency requirements. At the same time, a high priority is to assure a positive effect on our operations, concludes Karin Friberg.

If is the leading non-life insurance company with approximately 3.6 million customers in Sweden, Norway, Finland, Denmark, Baltics and Russia. The Group has approximately 6,900 employees, and the gross premium income was more than 39 billion SEK in 2008. You can read more about If here.