Broker lobbying EIOPA for catastrophe risk change

Reinsurance broker Aon Benfield is lobbying the European Insurance and Occupational Pensions Authority (EIOPA) for a simplified Solvency II internal model approval process for natural catastrophe risk.

The broker argues this would encourage insurers to better quantify natural catastrophe exposures under Solvency II, which is due to come into force in January 2013.

Under the current Solvency II framework, insurers can use either a standardised scenario approach or develop a partial internal model for natural hazard risks. A partial internal model would allow (re)insurers to benefit from the higher quality data used in the vendor models to calculate their natural catastrophe exposures, Aon Benfield argues.

However, the broker adds that a partial internal model approval process can be costly and onerous for both regulators and (re)insurers. Under the current QIS 5 rules this could lead to some (re)insurers, particularly smaller companies without the resources, to adhere to the simplified standard formula approach – despite resulting in misleading capital requirements. Aon Benfield contends this is because the standard formula fails to account for catastrophe model improvements over the past 15 years, which include greater location detail and increased differentiation by occupancy or construction.

“The use of CRESTA zone data in exposure calculations was common 15 years ago, but now most insurers and reinsurers use far more detailed data,” said Paul Miller, head of international catastrophe management at Aon Benfield Analytics, in a statement. “The Solvency II standard formula does not recognise this evolution so (re)insurers receive a higher risk profile and more onerous capital requirements. Our new proposal to EIOPA allows for effective risk management and more appropriate choices for reinsurance strategies.”