Solvency II – all 2000 plus pages of it – has been completed and is slated to go into force as of the first of January 2016. As befits a major reorganization of a major EU industry, it took a long time – eight years officially, but more like sixteen, if you consider the preliminary discussions. Its implementation and impact was therefore a major topic of discussion at the recently concluded European Insurance Forum (EIF) in Dublin.
Sylvia Cronin, Director of Insurance Supervision, Central Bank or Ireland, in her opening keynote address described the adoption as a “positive step forward;” adding, however, that “now the work begins.” The next step is the adoption of harmonizing legislation by each of the EU’s 28 member nations, which opens a Pandora’s Box of what she described as “regulatory arbitrage” and the problem of “uneven application.”
Issues arising from the harmonization process will be addressed by the European Insurance and Occupational pensions Authority (EIOPA) that is in charge of consulting and advising EU member countries with the proper procedures for implementing Solvency II into their individual legal and regulatory codes.
Cronin stressed the necessity of completing and filing “Own Risk and Solvency Assessment” reports (ORSA) as essential for compliance with the strictures of Solvency II’s Pillar I, relating to risk assessment and capital requirements. These assessments are essential in determining “a fair price for real risks,” she said.
A dozen years ago completing an ORSA report would have been relatively simple, however the speed with which the re/insurance industry has evolved and continues to do so complicates the assessment. The effect of the increasing placement of insurance over the Internet; the threats posed by cybercrime, as well as the possibility of an international regulatory regime, all raise questions as to how an accurate report can be compiled Cronin explained.
In a panel discussion Prof. Karel van Hulle, an architect of Solvency II, who advises the EIOPA explained that it would be issuing, “guidelines, bulletins and updates” to help EU member states implement Solvency II’s mandates. That’s where views on Solvency II differ.
In summary, regulators like van Hulle and fellow panel member Tim O’Hanrahan from the Insurance Department of the Central Bank of Ireland, see great progress in having one regulatory framework for the entire EU with the three pillar approach that embraces capital requirements, risk, corporate governance and requires realistic business assessments and models.
Among many attendees at the EIF, however, there are those who see it as an overly cumbersome, and, at least for P&C insurers and reinsurers, largely unnecessary and extremely costly intrusion on their existing business models that will stifle innovation, slow down growth, and ultimately drive further consolidation in the P&C sector.
“It will have only a limited impact on the non-life sector,” said Fabrice Frère, managing director of Aon Global Risk Consulting in Luxembourg. He also noted that prices in many lines are increasing, but that this has very little to do with Solvency II. It will, however, affect investments, as “allocating assets to equity investments” will become less favored than investments in “high grade corporate and government bonds.”
Frère also said pointed out that the costs of creating the internal models required by Solvency were “more than expected,” but he that they did produce some benefits as companies were able to “rethink how they manage their systems and data.” Ultimately improving risk management and the models it uses were an indirect impact of Solvency II.
It will be a while before the full impact of these regulations can be analyzed, but most people agree that moving from arbitrary capital requirements to flexible capital requirements based on the potential losses of the risks a carrier insures is probably a step forward.
Perhaps in the harmonization process smaller companies and captives will be given greater leeway for their reports and capital balances by national governments; thereby avoiding potentially ruinous costs. If so, they will be able to continue to operate independently, at least in the near future.
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