Agreement on Solvency II, the most important piece of legislation affecting European insurers and reinsurers, has finally been reached. But at the cost of a political fudge that leaves out one of the most important parts of the new regime: group support. This crucial component of the original directive had been opposed by some nations, and was dropped as a matter of expedience.
Group support was crucial. It would have allowed subsidiaries in European groups to meet local solvency capital requirements by a financial commitment from their parent. This would have enabled European groups to manage capital centrally. Without group support, subsidiaries will be forced to maintain financial commitments in each country of operation. This costs groups more.
Why did the fudge happen? The sad answer is that politicians, desperate to be seen to be acting in response to the financial crisis, allowed themselves to be pressured into a deal. They wanted the deal done quickly, just to show they are doing something.
Brussels, the home of the waffle, fine chocolate, and an excellent range of fruity beers, is also no stranger to fudge – including the political variety. But it would have been better to have had the courage to delay the Solvency II directive and iron out the very real differences that exist about group support, rather than go off half-cocked. European insurers are now engaged on the burdensome task of preparing for compliance with a version of Solvency II that is far from what was originally planned.
Insurers are now studying the directive in close detail. To report that they are not finding it simple would be an understatement. Unfortunately, many insurers will struggle to comply with this complex example of European regulation.