April 2007

Third Quantitative Impact Study (QIS III)

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)will conduct its third Quantitative Impact Study (QIS III) on Solvency II from April untilJune of this year. The goal of the study is to gain greater insight into the practicability andsuitability of the standard approach suggested.

Main differences between QIS II and QIS III

QIS II was considered an opportunity to test initial ideas on the calculation of technicalreserves, minimum capital requirements (MCR), and solvency capital requirements (SCR).

QIS III, although clearly based on QIS II, contains a number of changes that are not onlyeditorial in nature:

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  Operational risk is added – without diversification – to the basic solvency capital require-ments (QIS II tested three approaches, i.e. with full, partial and without correlation, albeitat a lower aggregation level).
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  Life:
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    Underwriting risk is no longer divided into the risk categories morbidity and disability.
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    A scenario-based approach is defined as standard.
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    The risk-mitigating effect of future policyholders' bonuses is now taken into account viaa bottom-up approach.
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  Non-life:
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    The premium and reserve risk are modelled in combination.
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    Cat risk: Concrete transregional scenarios are prescribed. Moreover, QIS III mentionssample regional scenarios for insurance undertakings operating solely on a regionalbasis and describes that these scenarios should be provided by the local regulators.
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  Market risks: The risk of concentrations has been added as a new risk category.
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  QIS III includes a risk category referred to as "counterparty default risk", i.e. the defaultrisk of reinsurers and financial derivatives.

Objectives and contents of QIS III

The aim of QIS III is to obtain concrete information that allows a better assessment of thequantitative impact of Solvency II on balance sheets and the resulting risk capital require-ments determined using the standard formula.

At national level, QIS III is being conducted by the supervisory authorities, and participa-tion in this study is open to all life, health, property and casualty insurers. In addition, QIS III is also geared to national and international insurance groups.

Prior participation in the QIS I or QIS II studies already concluded is not a prerequisite forparticipation in QIS III.

The following is required of companies participating in QIS III:

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  Calculation of the market value of investments
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  Application of the market value principle to underwriting liabilities. In cases where themarket value cannot be determined, it should be approximated by adding a cost-of-capital margin to a best estimate reserve.
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  Solvency capital requirements (SCR) are determined on the basis of the following table:

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  Minimum capital requirements (MCR) are calculated using a prescribed formula.
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  Solvency capital is categorised in a tiering system (Tier 1 to 3).
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  The calculations should be made both at solo company and insurance group level.

Further technical details can be found in the technical specifications http://www.ceiops.org/content/view/118/124/.

Outlook

Munich Re's declared objective is to actively shape the Solvency II project. This is reflectedespecially in the Europe-wide commitment Munich Re has been showing in various asso-ciations, working groups and committees during Solvency II's development process. Atimplemention level, Munich Re has classified Solvency II as a strategic issue, whichmeans that Munich Re wishes to inform its clients about important recent developmentsand changes and to provide them with support in implementing Solvency II.

Moreover, Munich Re encourages active participation in QIS III because a meaningfulresult regarding the practicability of QIS III, calibration of the standard formula, and result-ing capital requirements can only be reached at European level if the largest possiblenumber of companies takes part in QIS III.

These words will be followed by action. Munich Re will participate in QIS III and amongstothers take an active hand in shaping a workshop for the Spanish insurance association(UNESPA) in May.