The implementation of Solvency II capital requirements is expected to change the way insurers will operate.

The requirements are expected to bring an increasing focus on all aspects of risk management within insurance companies.

It will make a direct link between risk and capital requirements leading to changes in product design, pricing, hedging and reinsurance and capital optimisation.

As a result, insurers will continue to bolster their enterprise risk management programs, according to a survey by Towers Watson.

The survey involved 465 insurance and reinsurance executives, with the bulk coming from Europe and North America while 19% were based in the Asia-Pacific region.

The Solvency II requirements will allow complying insurers to use their own solvency models, and Towers Watson sees this as creating a competitive advantage for these companies.

Towers Watson Senior Consultant Naren Persad says the survey found many insurers intended to develop their own internal models for some risks.

“Internal model preparation is a concern, with only 10% of respondents believing these would currently pass the approval requirements,” he said.

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

Mr Persad says the survey shows many insurers are thinking about the implications of Solvency II, but it also found there was widespread need for capital-raisings among companies.

The survey found 60% of insurers citing this as a potential concern for meeting the new requirements.

“A similar proportion of companies expressed concerns about changes in the relative attractiveness of existing products and probable higher prices to consumers,” he said.