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Only 1 in 10 internal SII models would pass test

With little more than two years to go until Solvency II goes live, just one in 10 European insurers believe that their internal model would currently be approved for use, according to new research from Towers Watson.

The consultancy found that there had been only a negligible improvement in the proportion of insurers confident they would pass the test ahead of time since its last survey in 2008.

Towers Watson said that the so-called "use test" was the most commonly cited requirement that would prevent insurers passing, with 38 percent of respondents picking it out.

The "use test" assesses the extent to which an insurance firm's internal risk measurement systems are integrated into its day-to-day management processes.

Naren Persad, a senior consultant at Towers Watson, noted that internal model preparedness is also a concern in the run-up to Solvency II.

"This is likely to be one the greatest challenges facing companies, and some markets have already put in place formalised processes for supervisors to assess and are likely to approve the internal models for companies before the start of Solvency II," said Persad.

These challenges perhaps explain a fall in the proportion of insurers intending to use an internal model for Solvency II from 51 percent to 37 percent between 2008 and 2010.

In addition, the findings show that Solvency II is now expected to have a greater internal impact on insurance companies than previously thought.

When the survey was carried out last in 2008 only 27 percent were forecasting a significant impact on the executive management and the board - a proportion that has now leapt to 49 percent.

Further, the proportion of respondents expecting a high impact on the asset management function has grown from 15 percent to 35 percent.

Another significant movement in opinion relates to capital requirements. While only 31 percent expected stiffer capital requirements to come out of Solvency II in 2008 - and just 14 percent did in 2006 - this proportion is now 54 percent.

Insurers also expressed concerns about resource shortages. Researchers found that 56 percent of respondents picked this out as their greatest challenge.

"Solvency II requires skilled finance, actuarial and risk management resources and these are in short supply," Persad said.

"This is a particular problem as companies, supervisors and company advisers will all be competing for scare resources at the same time.

"Companies should now be looking to utilise their own internal resources via training programmes and Solvency II project work to embed the knowledge within the organisation."

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