Norton Rose’s of counsel gives the lowdown on what German reinsurers can expect from Solvency

Q: What impact is Solvency II likely to have on the German market?

A: Looking at the German reinsurance market, the impact will be less visible than one might expect. Despite the fact that the new regime introduces new capital requirements, the main focus of the reinsurers will remain on the capital requirements of the rating agencies. German reinsurers generally have a very comfortable capital backing.

If you take a look at the highly fragmented German direct insurance market, the answer is different. There are a number of small and mid-sized insurers and, in particular, life insurers, that are somewhat weak on the capital and ROI side. They will need to find novel solutions for the capital requirements or review certain lines of business in the light of those requirements.

This may well result in a higher restructuring and consolidation activity in Germany in the next five years. That said, the reinsurers will most definitely provide the full scope of solutions from financial reinsurance to hybrid debt to the direct insurance market in order to help balance the effect on the insurers.

On a global scale, there are two aspects of Solvency II to be considered. One is the non-EU reinsurers and insurers active in the German market, who will find that there will be changes in the way reinsurance agreements are drafted and concluded under the Solvency II regime, as well as a different approach to them from the side of the direct insurer.

The other aspect is the treatment of non-EU affiliates of German reinsurers and their integration into the German groups on the capital and risk management side.

Q: So will Solvency II benefit the reinsurance market?

A: All the benefits of Solvency II are going to be available from the start, whereas at least some of the burdens of Solvency II are being delayed until the future. So it makes Solvency II look more like an opportunity, in particular for a market as well capitalised as the German one.

In addition to that, we expect the German reinsurers to broaden reinsurance solutions to cater for the needs of all sizes of direct insurers under Solvency II.

I would count the option to have an internal model as one of the benefits, and the ideal candidates to implement internal models quickly are based in Germany. But even under the standard model, insurers can get almost full credit if they transfer risk to reinsurers with an excellent credit rating.

In particular for non-proportional reinsurance, the solvency capital relief will improve significantly compared to the current situation.

Q: What are some of the legal trends affecting the market?

A: Germany generally has a very stable legal environment. The biggest impact we can expect is going to come out of the new obligations for financial institutions.

Also the judgment by the ECJ on gender is going to be a significant change. Insurers will have to redesign many products, and they will have an opportunity to adjust rates. It will take some time for the market to recalibrate but, initially at least, I would not be surprised if it led to an increase in rates for a number of products. The important thing for reinsurers is that new unisex statistics will have to be produced, and it may not be so easy to relate them to the existing historical data.

Q: What are some of the challenges ahead for German (re)insurers?

A: In anticipation of Solvency II’s pillar II, for the direct insurance side the system of governance under Solvency II and numerous new reporting and back-testing systems will undoubtedly be a huge administrative burden. For the large German groups, our impression is that they have come very far in the preparation and will get the credit for internal models sooner rather than later, which is impressive.

This is equally true on the reinsurance side where companies will need to get to grips with the treatment of their non-EU affiliates and may even start a redomiciliation discussion to optimise the consolidation under Solvency II.

Clever investing will be both a challenge and a market trend. We are seeing reinsurers go out into alternative investments, such as renewables, more than they did before.

Q: What are you focusing on over the next year?

A: We are quite active in supporting the preparation for Solvency II in terms of products, systems of governance and compliance. Besides that, the run-off market is developing significantly – also in anticipation of Solvency II – and this is a big area of focus. Finally, restructuring and M&A activity may become active again before the end of the year. GR