01 June, 2010
What is QIS5?
During 2010, European insurers will be participating in the European Commission (EC)’s fifth Quantitative Impact Study(QIS5). The exercise will feed into the Commission’s further development of the Solvency II legislation and help to shape the final regulatory landscape. It will also form a vital part of the preparationsby both firms and regulators for the introduction of Solvency II. QIS5 represents the last opportunity for fieldtesting the current thinking on quantitative aspects of Solvency II.
One of the mostcommonly held myths is that QIS5 will only involve the calculation of capital requirements: the solvency capital requirement (SCR) and minimum capital requirement (MCR). However, Solvency II is aboutmuch more than just capital requirements, and QIS5 will maintain focus on the total regulatory balance sheet. Firms will need to provide market-consistent valuations of assets, technical provisionsand other liabilities as well as calculating the SCR and MCR.
The SCR is formulated as a reflection of the stressed balance sheet, so setting up the balance sheet correctly is therefore fundamentalfor obtaining meaningful quantitative results from QIS5. Despite some critics’ arguments to the contrary, recent developments in Solvency II thinking have potentially much greater effect on componentsof the regulatory balance sheet than on the SCR and MCR. The balance sheet has to be produced by all insurers, regardless of whether they use an internal model to calculate the SCR or not, makingQIS5 a useful real-life gap analysis for firms.
The timing of the exercise is critical, from a number of viewpoints. The Solvency II Directive (Level 1) text, which came into force in 2009, set out thehigh-level framework. Following the recent delivery of CEIOPS’ Level 2 advice, the Commission is now drafting the Level 2 implementing measures, and these are expected to be finalised during 2011....