Barrie & Hibbert Publish QIS5 Survey Results

Online, August 2, 2010 (Newswire.com) - Background
On 6 July, the European commission published its call for advice asking CEIOPS to run the fifth quantitative impact study (QIS5), the aim of which is to provide information about the impact of Solvency II on insurers' balance sheets and to test the practicality of implementing the processes and calculations proposed by Solvency II.

QIS5, which will run between August and November of this year, will provide insurers with possibly their last opportunity to influence the direction that Solvency II will take. For many companies, participation in the QIS5 exercise will be key to their own Solvency II implementation programmes, providing them, in the run up to the implementation date, with an opportunity to use real data to assess the probable impact of Solvency II on their capital position and to identify any management actions required in their capital base, business models and data processes.

Interpretating QIS5
As participation is one of the criteria for obtaining internal model approval for insurers entering the pre-application process, it's not surprising that many in the industry are a keen to understand the QIS5 technical specification. Areas of the text of QIS5 that have led to debate include a number of issues on how to set up the base scenario and how the spread stress and illiquidity premium stresses interact.

According to Barrie & Hibbert's Life Insurance Product Manager, Stephen Carlin, "QIS5 throws up a number of possible interpretations. If companies adopt different interpretations, the whole purpose of QIS5 could be invalidated. That is why the industry needs to quickly develop a common understanding and approach to the implementation and interpretation issues. To get the debate started, we hosted a webinar in order to share our own research and interpretation of QIS5 with the very people responsible for the ESG output necessary for delivering QIS5".

We already had a pretty good idea of the various methodologies being pursued by different insurers, continues Carlin, and we had documented our own interpretation of QIS5, and applied that to the development stages of our QIS5 Stresses Service. However, what we really wanted was to obtain detailed evidence of the approaches insurers were thinking of adopting and that is why we decided to conduct our QIS5 Standard Formula Survey. The findings of the Survey will also be useful to companies who want to produce their own QIS5 simulations."

Survey Summary
The survey specifically looked at the ambiguity around the use of a stochastic asset models, an essential part of the process of placing a market-consistent valuation on the complex liabilities present on many insurance companies' books.

These questions were designed to help companies identify where they hold a minority view and, more widely, to be aware of the points where different interpretations are possible and consider their position.
The survey also asked about wider, higher level, issues where further research may be required; or where the QIS5 approach isn't suitable.

The Main Findings
Responses from most of the largest insurers in Europe were received and over 60 insurance specialists signed up for Barrie & Hibbert's QIS5 webinar hosted from Edinburgh.

There were very few topics in the questionnaire where there was 100% agreement but on the majority of the questions there was a clear majority view on the interpretation or implementation question. Knowing this will be useful to insurers - even if their circumstances are different and they favour a minority interpretation, at least they will have a better understanding of their position.
The survey showed a range of interpretations to defining the base scenario cases. On the basic question of how to apply the illiquidity premium to a liability requiring stochastic valuation there was a 70:30 split with 30% wanting to apply the illiquidity premium outside of the ESG. There was also disagreement on which yield curves benefitted from the illiquidity premium with a slight majority applying it to the real and nominal curves but a significant majority intending to only apply it to the nominal yield curve.

The questionnaire responses also showed a range of interpretations on the calibration of the standard formula stresses. The most ambiguity exists around the interaction of the credit spread and the illiquidity premium in the stressed scenario.
On the wider issues questions there was more agreement. There was a clear majority view (59%) that further research is required on how to introduce an illiquidity premium into a stochastic valuation. To date work on this topic has concentrated on quantifying the illiquidity premium present in assets and classifying liabilities by an illiquidity measure. The question of how to allow for the illiquidity in a stochastic liability valuation has received much less attention.

Conclusions
Thanks to the Barrie & Hibbert Survey, companies taking part in QIS5 and using a stochastic asset model are more likely to be adopting a common approach. This will increase the likelihood of QIS5 delivering accurate results to assist CEIOPS and the European Commission in developing Solvency II.

In the longer term we can hope that the areas of uncertainty will be drafted more clearly in future technical specifications. We can also hope that the further work gets carried out in the areas identified as requiring further research.
ENDS
For further information contact Lisa McEwan or Sharon McLaughlin on 0141 4406797
Email lisa@mgcomms.com / Sharon@mgcomms.com

Notes to Editors
• Founded in 1995, Barrie & Hibbert are leaders in modelling financial market risk, providing stochastic models, economic scenarios and risk management products to insurance and financial services groups around the world. There are offices in Edinburgh, London, New York and Hong Kong.

• Barrie & Hibbert's innovative financial modelling software is used by around two-thirds of the European insurance industry, and is increasingly used by major international financial services organisations in insurance, banking, pensions and wealth management.