FERMA Concerned about ‘Excessive’ Solvency II Capital Proposals

March 15, 2010

A bulletin from the Federation of European Risk Management Associations (FERMA) notes that while it “supports the goal of the Solvency II European insurance regulatory regime, which is to enhance policyholder protection, its members are concerned by the impact that the recommendations of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) to the European Commission will have on the insurance market.”

FERMA President Peter den Dekker explained: “The main goal of Solvency II is to protect policyholders’ interests, and we represent the largest policyholders in Europe. We have serious concerns that excessive levels of capital requirements as they are currently stated by CEIOPS will affect the availability of insurance cover for medium and large European businesses.”

He also pointed out that the insurance companies “are concerned that they will have to raise premium by 20 percent for non-life insurance,” calling it a notable development.” But Den Dekker stressed that FERMA’s “main concern is the potential reduction in the number of insurers capable of covering our risks. This could force us to retain more risks on our balance sheet, impacting our ability to invest and remain competitive in a global economy.”

FERMA’s position accords with those expressed in the recent report published by the European Insurance Association (CEA) entitled “Why excessive capital requirements can harm consumers and the economy.” FERMA’s bulletin said the organization believes “that the lessons of the financial crisis, which impacted the banking sector, cannot be translated to the insurance sector. Insolvencies are much less frequent and well handled by market regulators.

“Increasing capital (by 30 to 50 percent according to the report) will not necessarily bring better security particularly for catastrophe risks, but will certainly have an impact on premium costs (up to 50 percent for certain line of business) and product availability.

“FERMA, therefore, recommends that a prudent calibration of the Solvency II models should be conducted prior to implementation.”

Captive Regulations

The bulletin added that in the “absence of adequate choice in the commercial insurance market, large policyholders will have to use alternative solutions to cover their risks. In many cases this would normally be achieved by an increased use of their captive (re)insurance companies. However, FERMA is also concerned about the effect of Solvency II on captives.”

FERMA said it “believes that the specific nature of captives should adequately be recognized in Solvency II. The formulas for calculation of capital requirements and corporate governance principles need to be simplified and aligned to the captive business models. The proportionality principle should apply to captive undertakings.”

FERMA is concerned that “under the present CEIOPS project most captives will be excluded from access to these simplification measures. This could result in a reduction of the number of captive (re)insurance companies, which have proven to be essential risk management and risk financing tools for large businesses.” [IJ Ed. Note: The controversy over captives revolves around the extent to which a captive covers risks to third parties in addition to those of the parent company. CEIOPS has proposed that these captives should come under the general regulatory regime].

FERMA’s position is that “a balance is required between protecting the consumer through capital requirements and guaranteeing the consumer a wide choice of competitively priced insurance products and mechanisms.”

Den Dekker added that FERMA is continuing its “discussions with CEIOPS and the European Commission on both the general impact on the insurance market and the captive industry.”

He also pointed out that “providing solutions to the European Commission is something insurers should be able to do better! FERMA is in positive discussions with the European Commission and is currently proposing solutions to protect the captive (re)insurance companies’ interests. We trust that the European Commission will be able to balance Solvency II requirements in a way that the real economy will not be affected and our members will still be able to be competitive.”

Source: Federation of European Risk Management Associations – www.ferma.eu

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