QIS5 runs from the beginning of July 2010 to the end of October for solo entities and until mid-November for group results, ahead of the planned publication of the QIS5 report in April 2011. This is likely to be the last QIS ahead of implementation and will reflect the European Commission’s most likely view about the parameters to be included in the standard formula, though the Commission will be using the study to test certain specific hypotheses.
Although the study will be an essential preparation for Solvency II for many insurers, a significant amount of effort will be needed to complete it and companies should allow up to eight weeks depending on the size and complexity of their business.
Dedicating the necessary resources over the summer months is a challenge in itself. If you have not participated in such a study before, mastering the learning curve quickly and mobilising the right skills to get the maximum value out of completing it is essential, especially as this is probably the last chance for insurers to complete a QIS and to influence the final guidelines for the standard formula.
QIS5 will calculate the expected capital that an EU insurance or reinsurance entity will be required to hold when Solvency II comes into force on 1 January 2013.
A key aim is finalising the calibration of the ‘European Standard Formula’, the default calculation method for all (re)insurance firms that will not be using an approved internal model to calculate their solvency capital requirements. Firms that plan to use ‘partial’ internal models will also need to rely on these calculations for areas of the business not covered by their model.
Two measures of solvency capital are calculated, a minimum capital requirement (‘MCR’), and a solvency capital requirement (‘SCR’). QIS5 calculates the capital required for each of health, life and non-life underwriting risk, market risk, counterparty default risk (credit risk) and operational risk. It then makes explicit allowance for correlations between, and within, these risk categories to arrive at an overall capital requirement.
Firms need to decide whether they have the required internal expertise (and if this expertise can be mobilised over the summer months) and whether they intend to carry out the exercise without external assistance.
In the past month, the European Commission has published the draft Technical Specification for the QIS5 study. This document is more than 450 pages long and highlights the need for dedicated internal and external resources to obtain the maximum value out of carrying out the QIS5 study.
The finance function should ideally be responsible for the balance sheet, counterparty default and operational risk inputs. The underwriting risk inputs will almost certainly require actuarial input. In order to produce the required asset and liability data segregations by class of business and event year, the assistance of the entity’s IT function may also be required.
Spreadsheet calculations
Based on QIS4, there will be interlinked Solo and Helper Tabs spreadsheets. Each entity will have to carry out a certain amount of pre-processing of asset and liability information before it can be input into the Helper Tabs spreadsheet. This pre-processing can be carried out in bespoke Excel spreadsheets, depending on the nature and complexity of the entity’s asset and liability structure.
The key pre-processed elements are:
Higher level claims and premiums
In addition to automatic data input feeds from the Helper Tabs Excel spreadsheet, it will also be necessary to input additional higher level claims and premium information into some of the Solo spreadsheet tabs.
While there is some element of automation of calculations within the Solo spreadsheet, considerable expertise is required to ensure that the inputs into the Solo spreadsheet have been calculated appropriately.
Certain elements of the spreadsheet are pre-determined by the European Commission including correlation structures which produce the capital charges for each risk type and overall MCR and SCR.
Figure 1 sets out the key asset and liability data input requirements, together with an indication of the challenges and importance attached to those data inputs.
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