Insurers across Europe will soon begin calculating their regulatory capital requirements under the new Solvency II regime. To date, most insurers have focused on building and calibrating their Pillar I models, be it under the standard formula approach or using an internal model.
Now they are shifting their efforts towards using these models to run their businesses. This is partly for compliance purposes; Solvency II requires insurers to link the calculated capital requirements to business decisions. But insurers should also see this as an ideal opportunity to overhaul their performance measures and better align incentives with risk and reward.