Solvency II

The solvency of an insurer must account for both expected and unexpected losses. Technical reserves are designed to cover the expected losses associated with existing policies and future business. The key elements of the process include:

• ensuring data availability and data quality,

• performing calculations in line with regulatory requirements,

• comparing results with past experience to validate assumptions, and

• conducting scenario and sensitivity analysis, such as evaluating the impact of changes in extrapolated risk-free interest rates.

TASC is committed to delivering high-quality work throughout this process. This includes developing the necessary software from open-source tools, documenting the process, and providing training for the insurer’s employees or liaising with the regulator as needed.

The Solvency Capital Requirement (SCR) is designed to cover the unexpected part of an insurer’s losses. The European regulator has developed a standard formula to calculate the SCR, which is intended to apply when an insurer’s risks align with the assumptions of the formula. While these assumptions are not explicitly defined, insurers are given discretion in applying the formula to their specific circumstances.

Despite criticisms, particularly from academics, the standard formula remains the preferred method for calculating the SCR and has been in use in the last fifteen years, surviving particular economic circumstances. 

TASC uses its expertise to apply the standard formula appropriately and make necessary calibrations to ensure compliance with the regulatory definition of solvency.

An internal model can be used as an alternative to the standard formula, either to cover the entire solvency capital requirement or to address specific modules or submodules of the standard formula (in which case it is known as a partial internal model). 

The application of an internal model is subject to approval by the relevant supervisory authorities and must be justified by the insurer’s specific risk profile.

There are no mandatory statistical models prescribed by the regulator, but methods should be relevant and up to date with current actuarial and statistical standards. Management, supervisory bodies, and other relevant stakeholders must understand the model’s output, assumptions, and any material changes over time.

TASC supports insurers in:

• Developing a full or partial internal model and calibrating it to meet regulatory standards;

• Validating the model to ensure it is robust and effective;

• Documenting the model in compliance with Solvency II requirements;

• Training management on key model characteristics;

• Communicating with supervisory authorities regarding model approval and other related matters.

The Minimum Capital Requirement (MCR) is the level of capital below which an insurer’s financial position would expose policyholders to unacceptable levels of risk. Therefore the formula for calculating the MCR incorporates the insurer’s technical reserves.

TASC assists with:

• Calculating the MCR in accordance with the Delegated Acts (DA).

• Validating the data used in MCR calculations.

• Documenting the calculation process, including assumptions, data, and software used.

• Conducting sensitivity analysis to assess the impact of different scenarios.

• Comparing results with loss experience to verify assumptions and outcomes.

Under the Delegated Acts, insurers are required to submit several key reports on a regular basis, including:

• Solvency and Financial Condition Report (SFCR)  

• Own-Risk and Solvency Assessment (ORSA)  

• Quantitative Reporting Templates (QRTs)

TASC provides comprehensive support to ensure the insurer meets these reporting obligations. From documenting calculation methods to validating test results, TASC helps insurers comply with regulatory reporting requirements concerning their solvency position and risk assessment.

In recent years, climate change risk assessment has gained importance, particularly following amendments to the Delegated Acts. The European regulator has issued guidance to help insurers assess climate change risks, allowing them to address these risks in qualitative terms, with the option to expand to more quantitative assessments over time.

The risks associated with climate change present new challenges for insurers, as they have never been evaluated on this scale before. The potential impact on the insurance industry is significant, and it is essential for insurers to begin integrating climate change considerations into their risk assessments.

The analysis of climate change should involve assessing the material impact on the insurer’s assets and liabilities through scenario analysis. The analysis should consider three key time horizons: short-term, medium-term, and long-term. The latter extends to 2100, a timeframe previously unexplored in traditional insurance risk management.

TASC helps insurers navigate this evolving area by:

• Assessing climate change risks specific to the insurer’s business.

• Guiding insurers through the climate change risk assessment process to ensure compliance with regulatory requirements.

• Supporting the transition to a more quantitative and comprehensive climate change risk assessment over time.

Read more on climate change risk consulting and check out for available publications on the topic.

TASC takes responsibility for the consulting work it provides to its clients. As such, it is well-positioned to represent the insurer in discussions with national and European supervisory authorities. 

Whether responding to regulator inquiries, seeking authorization (e.g., for implementing a full or partial internal model for SCR), collaborating during inspections, or requesting information on behalf of the insurer, TASC stands fully behind its work and its clients.