Specialty: Insights for the specialty insurance and ... - Ernst & Young

Test versus Solvency IIThe SST defines how much capital is required onaverage at the beginning of the year for insurers tocover their liabilities at the end of the year, even inan adverse situation — i.e., to have enough capital tocover the average of the 1% worst situations Havingadopted this framework, Swiss-based(re)insurers will have an advantage when EuropeanInsurance and Occupational Pensions Authority(EIOPA) meets expectations to grant “equivalence”status to SST. They are already prepared and usedto working within a similar environment based onexperience with the SST. However, this would alsomean that the requirements around Pillar 2 andPillar 3 topics will increase. For companies lookingto domicile in Switzerland, or indeed acquire a Swisscompany, the SST raises some interesting issues.The SST framework and the keydifferences with SIIWhile Solvency II is still in development, and a level ofuncertainty remains around the final requirements,SST provides useful insight on what’s to comefor European insurers. The underlying principlesof Solvency II and the SST capital calculation arebroadly similar. Companies use the SST to managerisk, to define the reinsurance structure andexposure steering, and to increase awareness of aportfolio’s risk. Even though the underlying principlesof the two solvency regimes are similar, there aresignificant differences.The standard model for SST differs from thestandard formula of SII. There is a relativelysophisticated SST standard model available fromthe Swiss Financial Market Supervisory Authority(FINMA), covering all risks on an analytical andstochastic basis. The standard model still requirescompanies to derive their own input parameters(e.g., around reserve risk). In this way, a fulldistribution function is derived for each risk type.Issue 1 — December 2012 Specialty 19