The latest draft technical specification for QIS5, the fifth Quantitative Impact Study of Solvency II, reveals that local politicians rather than CEIOPS are the real decision-makers when it comes to decisions on capital adequacy ratios and other CEIOPS recommendations, claims Keefe, Bruyette & Woods analyst William Hawkins. KBW said that the development shown in QIS5 was generally good for the insurance industry, with the EC's cover note displaying a number of points on which the EC has effectively overruled CEIOPS. Annex 1 of the EC cover note displays a number of changes to the CEIOPS recommendations, because of a "Policy decision". Mr Hawkins said that "we believe these two words highlight what we have always emphasised about the real power in the decision-making process lying with the EC and – implicitly – local politicians", adding that "we believe that much focus on the Solvency 2 consultation process to date has over-emphasised the role of CEIOPS in the process". KBW predicted that decision-making by politicians rather than number crunchers would generally be good news for insurers. On the technical side, KBW noted that the capital charge for equity investment had been reduced from 45% to 39% for global equities, and that the volatility shock had been reduced. CEIOPS has also increased its allowance for diversification of risk. The spread risk capital requirement has gone up, but there is a duration cap of seven years. On the risk-free rate, the EC has basically sided with the industry rather than with CEIOPS, with the basic rate referred to the swap curve rather than the government yield curve, and an acknowledgement that there needs to be some form of adjustment for a liquidity premium.