REGULATIONS covering the insurance business will be radically altered over the upcoming years in response to transformational changes undergone by this particular financial sector in the recent past. These new standards pertain to risk and asset management and reporting standards being implemented across Europe which will enable better comparison of insurance products and insurance companies in the future. Insurance companies say they will need much more support from actuarial experts for successful implementation of these regulatory challenges.
The Slovak Spectator spoke to Jelica Kľúčovská, the director of a team of actuaries working for KPMG in Slovakia and across the central and eastern European region and the chairwoman of the board of the Slovak Society of Actuaries, about the regulations that are being developed and what they will mean for insurance companies operating in Slovakia, as well as about KPMG’s creation of a CEE Actuarial Services Group, a regional group of its actuaries, the experts who are responsible for calculating insurance rates and coverage, the reserves of insurance companies and how to invest those reserves.
The Slovak Spectator (TSS): What are the regulatory changes that will be implemented in upcoming years?
Jelica Kľúčovská (JEK): The fundamental change from the viewpoint of supervision over insurance companies will be implementation of the framework directive of the Solvency II project. This is an updated set of regulatory requirements for insurance firms operating in the European Union.
Final implementation of this directive is due toward the end of 2012. This will be the largest exercise in establishing a single set of rules governing insurer creditworthiness and risk management ever undertaken. It will create a system for qualification and management of risks under which solvency requirements of insurance and reinsurance companies will directly depend on the extent of the risk to which they are exposed and how these risks are managed by the companies. The Basel II project for banks may serve as an analogy, but the risks to which insurance companies are exposed are to a certain extent more complicated.
Another fundamental change from the viewpoint of the financial accounting of insurance companies will be completion of Phase II of the Insurance Contracts project within the International Financial Reporting Standards (IFRS).
Regardless of how the final decision about the method of measuring insurance liabilities will look, it is already obvious that the method will be much more complicated than the relatively simple methods used today. Here we are speaking particularly about life insurance, which features policies signed for a long time period. It is expected that this phase will be implemented in 2013 and there are justified concerns that the way of valuation of technical reserves within the Solvency II and Insurance Contracts projects may differ.
TSS: What are the reasons for these new rules?
JEK: These rules are being developed to respond to the changes which have occurred not only in the insurance market but also in the financial markets over the last few years.
The products which insurance companies are presently selling have become much more complicated and are a combination of both insurance and investment. Thus the insurers undertake interrelated risks that can intensify or weaken each other and which were not so typical in the business of insurance companies in the past. This is why the current requirements for establishing the required capital level, the so-called Solvency I rules, are no longer sufficient.
In the area of financial reporting it is equally necessary to secure consistent measurement of insurance liabilities across all of Europe. Right now these reporting principles can differ significantly in individual countries. It is also necessary to have consistent reporting among the various financial sectors if individual products are to be comparable. Problems caused by the current financial and economic downturn have also underscored the importance of these new requirements.
TSS: What are the expected impacts of these changes?
JEK: It is particularly expected that implementation of these changes will force insurance companies to enhance their accent on risk management processes.
Risk management, valuation of risks and informing about risks are the slogans of today’s challenges.
TSS: What will these changes mean for insurance companies operating in Slovakia? Will these changes also affect other sectors?
JEK: The impact of both of these projects on insurance companies will be enormous – in general, not only in Slovakia. Insurance companies will need to adapt their internal processes, their IT systems and all their specialised capacities to the new requirements. Most large international financial groups have already started making the inevitable changes and they have found that adaptation to the expected regulations is extremely demanding, and this is not only in the sense of required finances. It has been revealed that Europe, as well as Slovakia, does not have enough specialists and the skills which are needed. In particular, there is a lack of actuaries and experts in the field of management and quantification of risks for the insurance companies.
A Slovak insurance company which is a member of a large international financial group can expect support from its parent company, especially with regards to methodological manuals. But securing implementation of these manuals may be more difficult as well as implementing one’s own system of risk valuation and proving that this system works across all segments of insurance. Because of this, all insurance companies in Slovakia, both those which are part of either large or small financial groups and those which are independent, will be under enormous pressure during the upcoming years.
TSS: What led KPMG to create a regional group to provide actuarial services in Central and Eastern Europe (CEE)?
JEK: KPMG has specialists-actuaries in several CEE countries, for example in Slovakia, the Czech Republic, Hungary, Poland, Romania and Latvia. Joining these capacities into one integrated group, the CEE Actuarial Services Group, will enable us to deploy, one-off, an adequate capacity of specialists for individual projects. The composition of the group also enables us to use the native language in the country in which a project is being carried out, when necessary.
Another reason for setting up this new horizontal organisation is that KPMG will adapt in this way to most financial groups which are also organised on a regional level so they can communicate across CEE with one partner. Last but not least, clustering these actuarial resources means a strong group of top experts, who are quite scarce in the region right now.
In cooperation with our clients we will be able to convey our experiences in the region to individual insurance companies and the experts who are preparing to handle the new requirements imposed on them.
The work of an actuary:
An actuary is an expert in insurance and financial mathematics who is responsible for calculation of insurance rates and coverage, the reserves of insurance companies and deciding where to invest reserve funds. An actuary assesses future risks with the main task being to ensure that the insurance company has enough funds at all times to cover its obligations towards insurance policyholders.
2. Nov 2009 at 0:00 | Jana Liptáková