October 26th, 2011

Global Influence of Solvency II Remains High Despite Uncertainty of Its Implementation

Posted at 1:00 AM ET

lightfoot_david_gcciDavid Lightfoot, Head of GC Analytics® - International

Despite several years of discussion and preparation, Solvency II continues to evolve in Europe and influence other regulatory regimes globally. The implementation date for Solvency II is a moving target. The current view is that Solvency II will be delayed another year and become effective January 1, 2014. A transition of key elements of Solvency II is also expected, but the final implementation date and extent of the transition rules will not be ultimately known until the Omnibus II directive is finalized and issued, which is currently believed to be spring of 2012.

The Solvency II regime has several key benefits, drawbacks and opportunities for insurance and reinsurance companies.

Solvency II calls for a greater transparency and understanding of risk. Not only will this improve a cedent’s ability to evaluate reinsurer credit, it will also likely bring more capital to the marketplace to support traditional, non-traditional and capital market products. Probably the biggest drawback for the insurance industry in Europe is the immense cost of compliance, which will come from many different areas, including the development and approval process for internal capital models and the creation of new disclosures.

Opportunistically, with regulatory capital requirements increasing, the benefits of diversification more fully integrated into the capital requirements and compliance costs being a relatively higher burden for smaller companies than larger companies, the appetite for consolidation within the industry may increase. This is especially true for smaller, less diversified companies. As capital for large, diversified insurance companies is generally more dependent on levels to support desired ratings, the appetite for consolidation among this segment should not be directly impacted by Solvency II.

Even though the final requirements and transition rules are not yet known, the potential of Solvency II is being recognized worldwide. Many countries outside Europe are looking to move to a regulatory model that has key aspects of Solvency II. In particular many countries have implemented or are considering:

  • A risk-based capital requirement which is broad in scope, meaning it covers asset, insurance and operational risks, with some form of stress testing requirements.
  • Requirements where companies are encouraged or required to self-report capital adequacy, similar to that required under Solvency II’s Own Risk and Solvency Assessment process.
  • Requirements that encourage companies to take ownership of and institute quality risk and capital management practices.

The transition to Solvency II is set to begin in Europe in only two years, and the rest of the world is watching closely, with regulatory aims of its own. Capital management is poised to become more important than ever before, especially in this changing and increasingly volatile reinsurance market. Guy Carpenter is uniquely positioned to help clients take charge of their portfolios and grow shareholder value in this new regulatory environment.

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