2012 Standard Formula Exercise for Solvency II: MFSA Report

On the 30th of April 2013, the Malta Financial Services Authority (the “MFSA”) issued a report on the 2012 MFSA Standard Formula Exercise for Solvency II.  This report summarises the results of the calculation of the standard formula for re/insurance undertakings that participated in the 2012 MFSA standard formula exercise.  The purpose of this exercise was to assess the level of preparedness of re/insurance undertakings licensed in Malta for the Solvency II Pillar I requirements.  On the 10th of August 2012, the MFSA requested 54 undertakings to participate in this exercise, 47 of which participation was compulsory; the participation rate in this exercise was that of 93%.

For the purposes of carrying out this exercise, the MFSA incorporated the proposed changes to the QIS5 Technical Specifications.  The objectives of this exercise were to:

• Provide a tool to re/insurance undertakings to calculate their capital requirements in terms of the Solvency II Pillar I requirements;
• Allow re/insurance undertakings which had participated in the previous QIS5 exercise to revise their assessment of the adequacy of the financial resources using an updated methodology;
• Provide a user friendly tool to undertakings;
• Allow the MFSA to monitor and assess the regulatory capital requirements of the re/insurance undertakings it regulates; and
• Continue the on-going dialogue between the MFSA and re/insurance undertakings prior to the new supervisory system.

In terms of the report “the detailed review conducted will result in a stronger validation of the solvency ratio, a deeper understanding of the risk profile of the undertakings and reduce any inconsistencies in the future”.

From an examination from the report, the following observations can be made:

• The overall Solvency II surplus over the Solvency Capital Requirement (“SCR”) amounted to €246m, lower by 60% when compared to the Solvency I regime;
• The significant reduction in the surplus is observed for the non-life and captive re/insurance undertakings;
• The solvency position for reinsurers and composites has deteriorated by a lesser extent when compared to the non-life and captive undertakings;
• The solvency position for the life undertakings and Protected Cell Companies (“PCC”) has improved under Solvency II;
• The Solvency II surplus over the SCR has reduced by 35% when compared to the QIS5 exercise;
• A number of re/insurance undertaking that were below the 100% solvency ratio threshold in terms of the QIS5 exercise has reduced;
• The proportion of re/insurance undertakings which had insufficient eligible capital to meet their Minimum Capital Requirement remained unchanged at 5% from the QIS5 exercise;
• The change in valuation principles for the assets and liabilities between Solvency I and Solvency II did not significantly affect the balance sheet of the market, as total assets only saw a reduction of 3.9% and total liabilities decreased by 10.8%;
• The total basic own funds for the insurance market has been maintained at around €1 billion; and
• In relation to PCCs, the report confirms that for this MFSA exercise, the solvency requirement calculations for PCCs were performed in line with the Solvency II principles for ring-fenced funds as set-out in the technical specifications.

In terms of the report, the MFSA is of the view that certain re/insurance undertakings seem to be more prepared than others and that there is still a lot of work to be done in order for these undertakings to be prepared for the Pillar I requirements and the standard formula calculation.  The report has helped the MFSA better understand “the risks of the undertakings and understand the undertakings’ and insurance managers’ approach to calculating the solvency requirements under Solvency II and completing the standard formula templates”.  However, the report also makes it clear that further work is required to “understand the Solvency II principles when calculating the solvency requirements using the standard formula”, and to this end, the MFSA intends to organise standard formula workshops in May 2013 to assist re/insurance undertakings in obtaining a better understanding of the standard formula requirements under Solvency II.

The full report can be viewed or downloaded from the MFSA website or by clicking here.