QIS5
QIS5 was conducted between August-October 2010.
On 14 March 2011, EIOPA (European Insurance an Occupational Pensions - previously CEIOPS) released results of QIS5 exercise conducted between August and November 2010. Following this, the FSA published a report summarising QIS5 results submitted by the UK solo and group insurers.
EIOPA’s report on QIS5 results concluded that the financial position of the EU insurance sector assessed against QIS5 requirements remains comfortable, with eligible own funds in excess of regulatory requirements by EUR375bn. This is a decrease of EUR 56bn compared with the current regime. Across the EU, 15% of participants did not fully cover the SCR and 5% did not fully cover the MCR.
QIS5, however, identified a number of areas where further work is needed, to improve the functioning of the system. Some of them have also been identified as areas of concern for Lloyd’s:
Non-life catastrophe risk sub-module
EIOPA’s report suggested that ‘industry generally considered the CAT sub-module to be too complex, inappropriate or difficult to implement’.
Insurers, such as Lloyd’s syndicates, where exposures lie predominantly outside the EEA must use the factor based Method 2. There was feedback that Method 2 was not risk-sensitive and was very penal. Criticism was expressed that the method was neither well-defined (e.g. premium split) nor an adequate reflection of risk.
Other comments were that there was no allowance for geographical diversification in this method and there was a large discrepancy between method 1 and method 2 results. Lloyd’s agrees with these criticisms and is working with the CEA and other London market insurers to prepare alternative approach.
Currency risk
A number of undertakings felt that currency risk was overestimated. There is also counterintuitive incentive to hold assets in excess of liabilities in reporting currency rather than the currencies of underlying liabilities. The FSA report expanded on the concern in their report, indicating that it ‘may not encourage good risk management for firms with significant risks and liabilities in currencies other than that in which they report’. Lloyd’s is working on a proposal to remove these concerns.
Non-proportional reinsurance adjustment
According to the EIOPA’s report, most undertakings failed to determine the adjustment for non-proportional reinsurance in the premium risk factors because of problems with data availability. The calculations were also seen as too complex. European insurers made some comments about changes they considered could be made to the adjustment for non-proportional reinsurance in the premium risk factors.
Lloyd’s is engaging with the European Commission and other EU stakeholders to raise concerns highlighted by QIS5 exercise as well as to suggest appropriate solutions to address the situation.
QIS5: background and relevant information
On 16 April, the European Commission published a draft QIS5 technical specification for consultation. The consultation process was limited to specified stakeholders: CEA, AMICE, CRO Forum, CFO Forum, ECIROA, FERMA and Groupe Consultatif. Lloyd's had the opportunity to feed back comments via the CEA.
On 6 July, the European Commission published final technical specifications for QIS5. Managing agents should expect participation in QIS5 to be mandatory for each syndicate.
Lloyd's issued both high level guidance and detailed guidance for QIS5.
On 24 August, CEIOPS published the main QIS5 spreadsheet to be used by solo undertakings and groups to complete their QIS5 submission.
On 7 and 8 September, Lloyd's held QIS5 workshops for all managing agents. FAQs arising from these workshops and subsequent technical questions are available here.
On 28 September, CEIOPS issued a 17 page 'errata' to the QIS5 technical specifications.
On 26 October, CEIOPS issued the latest list of methodological issues raised by participants and supervisors on QIS5 which contains 180 questions and answers.
