Potential Solvency II Insurance Regulations Ramifications
Potential Solvency II Insurance Regulations Ramifications, by Claude Penland
“Solvency II” is the Name for the Proposed Regulations for Insurers that Operate in the European Union
This article will cover some potential Solvency II ramifications and concerns. “Solvency II” is the name for the proposed regulations for insurers that operate in the European Union and which, in many cases, will increase the amount of surplus that insurers must hold by 2013.
These requirements’ complexities may drive some insurers and reinsurers to outsource their asset management and abandon captive insurers. Under Solvency II, bond holdings are strongly encouraged, and equities, real estate and alternative assets are discouraged due to increased surplus capital requirements if one holds risky assets. Some are even concerned that bond yields will be driven artificially low by the increased insurer demand for bonds.
There are not enough regulators with appropriate experience. However, the European Insurance and Occupational Pensions Authority has begun additional regulatory training, and expects to hire 70 to 90 people by 2014. Employees with the appropriate skills, especially actuaries in Ireland, UK, USA and other regions, have seen their compensation increase by quite a lot.
Companies have had their Solvency II compliance costs add up. For example, Lloyd’s managing agents will have spent at least $400 million on compliance by 2013. Worldwide compliance costs are estimated to be $4 billion. Some have argued that International Financial Reporting Standards and Solvency II regulations unfairly affect businesses twice and overlap.
Solvency II regulators would like those subject to Solvency II to be prepared, in the aggregate, for approximately a $50 billion catastrophe. However, several reinsurance brokers have said that catastrophe risk is not accurately calculated within the ongoing regulations. That they do not reflect the increasing complexity that catastrophe risk modelers have already baked into their work. Under proposed rules, Lloyd’s would need to double their catastrophe reserves.
Pension funds do not believe that they should be subject to Solvency II rules, while many insurers would prefer that pension funds be held equally accountable. The rules also have many implications for private equity and labor outsourcers.
An increase in redomiciles, mergers and acquisitions are expected due to these regulations. Japan, Bermuda and Switzerland are presently undergoing equivalency tests with the European Union. Areas such as Guernsey have elected to forego equivalency and instead chosen to stand alone. German insurers and reinsurers have recommended an outright overhaul of the rules, as they will have disproportional effects on smaller firms.
Related posts:
- Switzerland’s Insurance Regulations May Be Tougher Than Solvency II
- Marine, Aviation and Transport Insurers must raise rates due to Solvency II
- Oliver Wyman and Morgan Stanley report on Solvency II’s Expected Effects
- Private Equity investors need to think about Solvency II
- Solvency II Reforms will alter Europe’s Financial Institutions muchly
