October 5th, 2011

Solvency II: Changing the Game

Posted at 1:00 AM ET

Changing regulatory requirements have remained high on the industry agenda this year, with particular attention focused on Solvency II. Despite its nominally European focus, Solvency II presents a wide range of considerations - and opportunities - to insurance entities worldwide. This new regulatory framework will enact a fundamental change in the way the European insurance industry looks at risk and risk management practices, mandating sweeping changes to capital requirements, corporate governance programs and disclosure practices. All businesses that have operations, subsidiaries or affiliates in Europe, write coverage in Europe or do business with insurers in Europe should be preparing now for these wide-ranging changes.

Market consensus holds that Solvency II will ultimately benefit reinsurers, as primary insurers, faced with higher risk-adjusted capital requirements, will turn to the reinsurance market as a relatively inexpensive source of additional capital and risk transfer. The consensus view further assumes that the additional revenue earned from the primary market - from mutuals and smaller carriers, in particular, that may need to add reinsurance to comply with Solvency II’s capital requirements - will more than offset reinsurers’ own additional investment costs and risk-adjusted capital constraints over the long run. While reinsurance will continue to be an attractive source of capital and a flexible risk management tool for many insurance carriers, Guy Carpenter believes that the simplistic assumptions noted above conceal the numerous challenges, and a few opportunities, Solvency II presents to the market.

Preparations for the new regulations are already a significant industry-wide burden, but Solvency II does promise to bring some genuine improvements to the market. Noting that the results of the fifth Solvency II Quantitative Impact Study (QIS 5) show that the primary insurance industry in Europe does not require a great deal of additional capital, and anticipating that the overall tenor of further changes to the rules will be dilutive, we perceive a number of positive developments from a cedent’s perspective.

Click here to read additional stories about Solvency II in GC Capital Ideas >>

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