Smaller insurance businesses may have to make difficult decisions about their long-term viability, warns Moore Stephens

Smaller insurance businesses may have to make difficult decisions about their long-term viability under Solvency II, warns accountancy firm Moore Stephens.

“It seems likely that larger companies will be better equipped than their smaller counterparts to deal with life under Solvency II,” said Simon Gallagher, head of the firm’s insurance industry group.

“Size generally means better economies of scale, more scope to diversify, and more resources to meet regulatory requirements. Larger companies will also have more opportunity to redistribute capital between different lines of business, and to explore the opportunities arising from European consolidation.

“For smaller companies, required to carry higher levels of capital, there may be the need to buy in external expertise with the knowledge and experience necessary to meet the new requirements.

“Ultimately, they may have to question whether they can stay in business in a market which calls for much higher levels of capitalisation.”

Gallagher also says that insurance firms should effectively ignore the two-year delay – from 2010 to 2012 – in implementation of the Solvency II regime, and press ahead now with plans to ensure that their businesses are compliant.

He notes, “For everybody, large and small, the best advice is to ignore the two-year delay in implementation, and to effectively act as though uninsured.

“Although Solvency II could lead to some pain in the short-term, it may provide opportunities for European insurers to source more flexible and more innovative forms of Tier I capital to support better risk management performance.

“The indications are that the rest of the world will eventually adopt initiatives similar to Solvency II, particularly given the tacit support already expressed for it by the increasingly well-regarded and influential International Association of Insurance Supervisors.

“The opportunity exists, then, for firms in Europe to embrace the fundamentals of Solvency II now, and to gain a clear market advantage.”