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Ernst & Young recommends constructive
evolution of regulatory guidance for insurance industry
amid the financial crisis
Zurich, - The insurance industry and regulators should
use the current global financial crisis to drive a constructive
evolution of regulatory guidance, says Ernst & Young’s
Global Insurance Center.
The insurance industry faces fewer urgent liquidity
challenges compared with banks. However, the valuation
of assets has been severely affected by the crisis and
capital reserves in many insurance companies have been
severely depleted.
“This is a clear sign that the interconnected web
of the global financial markets has far greater implications
than the industry could have predicted,” says Philipp
Keller, leader of Ernst & Young’s Solvency
II Taskforce. “The significant impact of the financial
crisis highlights the need for enhanced risk management.
It is our view that a principles-based, economic and
risk sensitive approach such as Solvency II, grounded
in solid governance and supervisory principles, is the
right response at this time. This will produce timely,
consistent and transparent messages to the public.”
Principles-based regulation places responsibility for
risk management with the management and board of the
regulated companies. It drives risk management standards
appropriate to the complexity of the business. This
will foster understanding and accountability for the
risks taken but will also produce a major challenge
for management teams and boards.
In addition, the Solvency II Pillar II standards on
risk management, and the market discipline encouraged
by Pillar III, add a qualitative dimension to complement
the quantitative capital requirements. This will help
avoid over-reliance on models, which was a key feature
of the crisis for the banking industry.
Keller comments, “We have to recognise that a regulatory
framework like Solvency II in its currently anticipated
form, while a significant improvement on current prudential
supervision, will never be able to provide all the answers
and can only be one element of sound risk and capital
management.”
Ernst & Young urges the industry and regulators
to make use of events such as the current financial
crisis to drive a constructive evolution of the regulatory
guidance. This evolution should:
* complement the Solvency II regime with short-term
liquidity testing and cashflow analysis to allow a more
holistic approach to anticipating the impact of adverse
events
* place more emphasis on the articulation and testing
of company-specific threat scenarios, in addition to
the standard quantitative requirements
The current development and the anticipated implementation
of the Solvency II framework should be continued in
close cooperation between regulators and the industry.
Ernst & Young maintains a Solvency II website that
provides up-to-date information on proposed regulations
and commentary on the potential impact of the Solvency
II framework.
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