Ernst & Young’s (E&Y) Global Insurance Centre has recommended the insurance industry and regulators use the current global financial crisis to drive a “constructive evolution of regulatory guidance”.

It has called for increased risk management and is spruiking the governance and supervisory principles of Solvency II as “the right response at this time”.

E&Y Solvency II Taskforce Leader Philipp Keller says the Australian industry is generally in fairly good shape.

“You are quite well positioned compared to other jurisdictions, ” he told insuranceNEWS.com.au. “It is a sophisticated industry with a sound regulatory framework.

In a report E&Y says the insurance industry faces fewer urgent liquidity challenges compared with banks, but warns: “However, the valuation of assets has been severely affected by the crisis and capital reserves in many insurance companies have been severely depleted.”

Solvency II assesses the capital needs of insurance companies by evaluating all risk using an economic assessment. It is likely to be introduced as part of the capital regulatory regime for European Union insurers from 2012.

E&Y says regulators and insurers should now engage in short-term liquidity testing and cashflow analysis and also evaluate company-specific threat scenarios.