A grey cloud still looms over Solvency II, as feared market instability and confusion over how it will work leaves the industry feeling less than sunny. But will the long-term pros be worth the short-term cons? We zipped over to Brussels to hear the latest talks

Ten years in preparation and not due to come into force until the end of 2012: Solvency II is clearly one for the connoisseurs of the long haul. The long-awaited insurance directive reached a key staging point earlier last month when the European Commission held an open hearing in Brussels to thrash out how the weighty directive will be implemented.

GR joined the scores of insurance professionals converging in the city to check the temperature of the Solvency II debate, and found the mood fairly chilly. The day-long hearing showed that many still have deep concerns about how the directive will work. The advice drawn up by regulators umbrella body the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) for the Commission came in for particularly harsh criticism.

European Commission internal market commissioner, Michel Barnier, began by confirming that the implementation date for Solvency II will be put back two months to the end of December 2012. Yet, even with this delay, will we be prepared? As Standard & Poor’s European insurance criteria officer Rob Jones said: “Time is getting quite tight and the industry is far from ready.” European insurer federation CEA’s director-general, Michaela Koeller, added: “There is a lot of uncertainty about how this is going to work.”

Deloitte insurance partner Andrew Power, whose firm has carried out an assessment of the Solvency II implementing measures, said the directive could bring long-term benefits to the industry. But it would mean short-term disruption for the EU’s insurance industry.

Inner turmoil

Like most who spoke at the event, Power focused on the higher levels of capital that insurers will have to set aside as a result of the directive. Some lines of business would be affected more than others, he predicted, warning that within the general insurance context, long-tail lines were particularly vulnerable. “There’s a huge impact in terms of long-tail commercial lines and certain health markets,” he said. But the industry as a whole faces disruption, he added: “Anything that increases capital requirements will potentially harm the industry’s competitiveness and may make it more unstable in the short term. You will see insurers realigning asset and investment portfolios. It will have implications for financial stability and impact on financial markets.”

Jones agreed that any capital increase would have damaging consequences. “Twenty-five per cent of European insurers would have to increase their market capital, reduce lines of business or even close for new business.” The added capital would potentially undermine competitiveness, with a “negative” impact on ratings, he warned.

AXA’s head of risk, Jean-Christophe Menioux, added that for some lines of business, Ceiops’s proposals would mean a 50% increase in capital requirements, leading to a 30% lift in premiums. “Customers are not ready to pay the price, particularly in the short term,” said Menioux, who is also chairman of the CRO Forum.

Dieter Wemmer, chief financial officer of Zurich, agreed: “Any increase in capital requirements will mean expense for our policyholders and make it less attractive for our investors. The goal of Solvency II is not to create a zero-failure regime; a regime that would make failure impossible,” he said.

Menioux said the specification for Quantitative Impact Study 5 was a move “in the right direction” compared to Ceiops’s previous advice. But Wemmer pointed out that the long-awaited implementation of the International Finance Reporting Standards could further complicate matters. Balance sheets look set to become more volatile as a consequence of the new accounting standard, he said, with potential knock-on consequences for long-term competiveness.

Last dress rehearsal

Ceiops’s representatives were somewhat touchy – unsurprising given the hostility directed at their advice. On the European Commission’s recent watering down of Ceiops’s implementation measures, secretary-general Carlos Montalvo said: “We are not too happy with the overall effect of the changes.” While he acknowledged that many felt the increased capital requirements outlined by Ceiops were too harsh, he believed it was just as valid to suggest the supervisors’ body had been too generous.

Power welcomed the transitional measures recently proposed by the Commission to cushion the directive’s impact. “Unless we have transitional measures, the effects could be very destabilising, not just for the insurance market but for consumers,” he said. Koeller cautioned that any such measures needed to be “time limited” and Bernardino added that another dry run must be avoided – QIS5 had to be the last.

President of the Federation of European Risk Management Associations (Ferma), Peter den Dekker, said that any move that undermined the insurance industry would have damaging consequences for the wider European economy. “We are concerned about the availability of insurance for our multinational companies doing business across the world, not just in Europe. Without availability of insurance, we cannot continue to do business in certain regions.”

With the still unfolding Greek debt crisis no doubt at the back of his mind, den Dekker warned: “Uncertainty is something that the European economy doesn’t need at the moment.” GR