Solvency II Article in Post Magazine
11 February 2010
Solvency II is an EU directive aimed at ensuring Insurance companies have enough capital to support the level of risk they have. It comes into effect in 2012. The articles are suggesting that much of the necessary work for Insurers to be able to comply with this directive needs to be done in 2010.
The article picks up on the fact that a new draft of the agreement has been released which demands that the level of capital needed is significantly increased. The ABI has said that the result would be a rise in the solvency capital requirement of around 63% for general insurers. The article suggests that this rise is not justified, but most observers do not think the change will be reversed.
This change in the level of capital required could have several possible consequences:
- Premium increases, which is not the intended consequence
- Bankruptcy of some insurers (one observer says ‘a large proportion of European insurers’)
- Greater reliance on reinsurance
- Restriction of business activity
Insurers can adopt the Standard model for Solvency II or an Internal model. Using an Internal model seems to allow the insurer to define their own strategy for risk management and capital, but it needs to be approved by the regulator. Of the insurers contacted by the magazine, less than a quarter intend to adopt the Internal model. This approach is said to involve a lot of work and would not benefit the smaller companies much.
Solvency II is thought by different people to be likely to affect the way insurers are structured and the way they work:
- Consolidation in the market – relocating to deal with one rather than several regulators. Brit has moved to the Netherlands, Beazley to Dublin and RSA setting up its reinsurance in Dublin. Some say these moves are not relater solely to Solvency II. Tax also has an impact.
- Restructuring - There could be disadvantages in having a large number of subsidiaries within an organisation.
- There could be acquisitions. QBE think it will make acquisition easier. Some smaller players might be forced out of the market and become targets.
- New players emerging. As some are forced out of the market, some will take opportunistic advantage and create start-ups. These will have less trouble meeting the regulatory requirements because they will not be hampered by legacy systems.
The US is set to introduce a similar regulatory framework in the future, but it could be several years away (each state has its own regulation at the moment). Solvency II might well be the standard around the world.
The article covers some of the same ground, but adds the possibility that some insurers might withdraw some of their products which have been created on the assumption of high investment yields, moving to a more cautious approach. This will mean cover no longer being available for some products, and policyholders bearing more of the risk themselves.
