GDV signs up to CEA/CRO Forum proposal

The German Insurance Association (GDV) has reached agreement with its members and come out in public support for the joint solvency model proposed by the CRO Forum and European Insurance Association (CEA).

In January the CEA and CRO Forum presented their views on the model that should form the basis of the Solvency II regime to an open meeting of CEIOPS - but this move was undermined at the time by the absence of support from the federation representing Europe's second largest insurance market.

The GDV reached internal agreement in the middle of February and the organisation's head of business administration, Dr Thomas Schubert, said the delay in signing up was purely administrative and the GDV had complete faith in the CEA/CRO Forum proposal.

"The GDV agreed with the CEA/CRO proposal, it was just a question of time. We wanted to ensure there was a good discussion of the proposal. We fully support the CEA/CRO paper, without any caveats."

Following the publication of the GDV's new standard model (Life & Pensions, January 2006, p34), some industry experts raised concerns that it contradicted the CEA/CRO proposal.

The German organisation's use of book value accounting-derived numbers to calculate solvency levels appears to contradict Schubert's assertion that: "Market values are a fundamental requirement of risk management." But the GDV argues that the use of book values is only an intermediate step to help its members start down the road to full market consistency.

According to Schubert: "We support market valuation as we view this as a basic requirement for risk management. But contrasting the CEA/CRO Forum's proposal to ours is like comparing apples and oranges.

Our model is in line with their proposals. The difference comes down to the fact that our approach is designed for implementation and theirs is a lobbying paper that is concerned with theory."

According to Schubert: "The GDV's model is designed as a practical way for small and medium-sized companies to apply the same rigorous level of risk management as the large, pan-European firms that make up the CRO Forum". Here the GDV is echoing a concern voiced by some regulators that large sophisticated institutions might exploit the Solvency II process to increase market dominance at the expense of their smaller rivals.

In other words, the GDV is trying to level the playing field, explains Schubert. "The key difference is that small and medium-sized companies do not generally have the complex internal models used by members of the CRO Forum - an organisation made up of the 13 largest European insurers."

The GDV proposes that once the small or mid-sized institutions have implemented the model, book value accounting figures can be converted into market-consistent values, which can then be used to provide solvency figures that are compatible with ones produced under the CEA/CRO Forum approach.

Schubert acknowledged there would be slight discrepancies between the two approaches but said that this was inside an acceptable margin of error. "Any difference between the market value and the accounting figures should form part of the solvency margin."

Schubert was confident that instead of acting as a divide between the European insurance industry, the GDV proposals were a demonstration of its unity. And in advancing models for implementing a solvency strategy, it typified how the industry and not the supervisors were dictating the debate.

"The European insurance industry now has a united view - the supervisors are still discussing their approach but we have a common stance, and we can only benefit from this."

For its part, the CRO Forum may help refute the charge that it is an exclusive club for big players by publishing a new study that will answer in detail all the questions as to how the cost of capital will be calculated under the solvency framework that it is putting forward in conjunction with the CEA.

Thomas Grondin, chief risk officer for Aegon, will head a study that will be divided into two parts. The first is intended to provide information to high-level individuals in insurance organisations, and the second part will comprise detailed examples of how the CRO Forum's idea will work in practice.

The CRO Forum wants to improve on the model of the Swiss Solvency Test where the cost of capital is given a market premium across all businesses - a process that Grondin said does not allow for investors expectations.

The study is expected to be completed by April. At the same time the UK Treasury, in tandem with the country's financial regulator, the FSA, has launched a consultancy paper asking for industry input to formulate an approach to Solvency II discussions at EU level. The deadline for responses in April 28, 2006.