QIS1 results inconclusive

The first qualitative impact study (QIS1) organised by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) has been completed, but the results are inconclusive. The study, part of the development of the technical provisions for the forthcoming Solvency II, directive has proved of limited value in providing international comparisons, say observers.

QIS1 required insurers across Europe to estimate their liabilities within a series of confidence limits. However, a combination of different approaches to the methodology used by different countries and an already heavy workload on small and medium-sized companies resulted in data that was incomplete and not useful to make international comparisons.

With a process that includes data from both life and non-life insurance businesses totalling over 300 separate organisations, some degree of error is to be expected but the QIS1 process produced results that differed radically from expectations.

For example data from several countries which contributed to the QIS1 project gives values that are higher for sixtieth percentile than the following seventy-fifth, and in the case of Portugal and France, higher than the ninetieth percentile, in the confidence interval approach.

Seamus Creedon, head of KPMG's UK actuarial practice, and part of the Groupe Consultatif Actuariel Europeen team that reviewed the report on behalf of CEIOPS, said that there were no logical reasons for such a result other than typographical error but argued that at this stage of the process, expectations should not be too high.

"Studies of this nature are always a learning process: we could find ourselves at QIS5 or 6 before it starts delivering internationally comparable information. CEIOPS want this process completed quickly but privately a lot of people are saying that it will need many iterations before it provides useful information."

A key problem was the lack of a universal methodological approach. Even when regulators attempted to standardise results - German and Danish insurers agreed a standard system for calculating their own figures with their respective regulators - the consequence is that while both countries' results are internally consistent they are not comparable with each other.

The upshot of this international variance, said Creedon, was that the only firm international comparison that could be drawn was that UK-based firms generally took a less prudent approach than their Europe counterparts.

"However, the UK has traditionally reserved on undiscounted best estimates of future claims whereas other countries generally have more prudent approaches, so this was pretty much as expected," said Creedon.

A complaint levelled at the QIS1 survey is the impact on manpower, with smaller companies being hit hardest. Spain for example saw a steep drop-off in its participation rates between the provisional and actual QIS1 survey - with the second attempt falling victim to the priorities of posting end-of-year results on the peninsula.

Creedon said this is likely to be an even bigger factor as CEIOPS unveiled the second stage of the study, which in addition to refining the data on technical provisions also includes questions on the cost of capital approach.

"QIS1 has exposed the difficulties of working in so many dimensions, and I think that there will be more confrontation over QIS2 which will involve a great deal more work, particularly for the smaller firms.

"You are comparing results coming out of 25 countries across life and non-life, and you are trying to introduce new approaches and it is quite a tall order. It is okay if you have one bright actuary with nothing to do for two months, but that is not a luxury that everyone has."