Eighty percent of major European insurance carriers have started to implement Solvency II, a new survey from the accounting firm Ernst & Young, New York, finds.

Solvency II, a directive of the European Commission, seeks to ensure the financial soundness of insurers doing business in Europe. The commission is scheduled to submit a draft of its provisions to the European Parliament in July. If approved, implementation would start in 2008 and is planned to be completed in 2010.

Although 61% of 54 large European insurers E&Y surveyed see Solvency II as a means to improve all facets of their risk management, many said they were far short of being ready.

The surveyed companies were spread across 16 countries and had average assets of close to $138 billion.

In a recent teleconference, Lex van Overmeire, head of Ernst & Young’s Solvency II taskforce, noted that Solvency II increases pressures on insurers in Europe to develop sound internal economic models, improve information systems, enhance data collection and upgrade the skills of managers within their organizations.

While 30% of insurance executives surveyed think of Solvency II as just another regulatory nuisance, 61% believe it would improve their company’s ability to manage risks and encourage an improved understanding of risk throughout their organization.

Among surveyed carriers, 20% think their current capital models already comply with Solvency II, while almost 50% thought their internal models need major improvements to meet its requirements.

The findings suggest the industry in Europe is moving toward thorough assessment of capital needs, E&Y experts concluded. That can lead to better use of capital on hand, improved business planning, better product pricing and more significant profit objectives, they noted.

The survey also found 53% of the insurers think they will encounter no major problems in changing their information systems to meet Solvency II requirements–although some larger insurers indicated they would probably have to make extensive changes to their information systems.

In addition, 64% expect they will have to upgrade the skills of actuaries and risk managers in their organizations to deal with Solvency II. Of these companies, 15% admit that their employees’ current skills fall short of the level required, and many expect problems in hiring competent people, Ernst & Young found.

Fewer than 50% said they had adopted risk-weighted performance measures for their companies. These measures compel management to be more accountable for their decisions and to consider risk and performance in choosing strategies, E&Y notes.

By imposing company-wide internal controls, Solvency II links regulatory requirements with the need for insurance executives to scrutinize business strategy, E&Y experts said.

The directive presents “a great opportunity” for insurers to improve cost control and create real business value, commented Niek de Jager, a member of Ernst & Young’s task force.

“However, in order to reap the benefits, companies need flexible information systems and data models,” de Jager said.

Solvency II requirements could ultimately make an impact on U.S. insurers, observed van Overmeire. U.S. insurance regulators are paying close attention to the directive and share its goal of assuring the financial fitness of insurers, he noted.