No one will make it official, but the new regulatory framework could cost the industry far more than an old estimate of €3bn. Liz Booth reports.

Sometimes it seems that Solvency II has been with the insurance industry for ever but, in reality, the hard work is only just beginning.

The principles on which the regulations will be based have been finally agreed in the framework directive but the detail still has to be worked on. Companies across Europe have slightly more than three years in which to fine-tune their operations and meet the new regulatory demands.

All this will cost a lot of money. “We did ask the industry this question and they have calculated €3bn. But it is not easy to calculate the final costs,” says Karel Van Hulle, head of unit for insurance and pensions, financial institutions, at the European Commission.

Graham Fulcher, head of the UK non-life team at Watson Wyatt, agrees that it is difficult to put an exact figure on costs. “It is all a question of how much is purely regulatory and how much is actually companies improving their business operations.”

And it will vary, depending on the details that follow in the next year or so, he says. For example, much of Pillar 1 and 2 may well be useful to companies, delivering added values. But Pillar 3 may be much more of a regulatory burden – at a high cost to business.

Jim Bichard, a partner at PwC, says the final bill may well go beyond €2 to €3bn. “Companies never do things in isolation. The more sophisticated or larger companies will already be considering Solvency II in other decisions taken now. I would not say we have empirical evidence of an exact cost but we have done some quick surveys and it looks to be up on those figures.”

Companies responding to the PwC survey estimated the cost as a proportion of their gross written premium. Bichard says a surprising number put the figure at higher than 3%, which means the final tally could be double or triple present estimates.

As Fulcher and Bichard say, the difficulty is that the figures will vary from company to company, depending on whether they make significant investments or do the bare minimum to meet the regulatory requirements.

There is also the question of whether companies are spending money purely on Solvency II or whether they are including the regime in their development plans. Bichard says: “We are getting closer to the tipping point for more sophisticated and larger companies, not least because bigger companies will take that much longer to effect change.”

Although Van Hulle is “amazed” at the industry response to QIS4 – receiving answers from 1,500 insurers and reinsurers (from a possible 5,000) across Europe – there is still concern that not everyone is committed as yet.

Both Bichard and Fulcher say the level of involvement is mixed, with some companies well ahead. Both agree that Lloyd’s was seen to be behind in the UK but has been doing a massive amount of work since March and is now on top of developments.

Bichard, however, remains concerned about captives and run-offs, warning that many have yet to see how the initiative is relevant to them. “Some of the niche players really struggle to see the benefits. They are not burying their heads in the sand but there are some who do not understand how it will affect them.”

Van Hulle remains confident. Pointing to QIS4, he says: “When we were testing Basel II, we never got more than 10% of companies involved. There always will be companies that are behind but I don’t think it is unfair to say that the industry is preparing for Solvency II – they know it is a step in the right direction.”

Commenting on criticism that Solvency II will be no better than Basel II in preventing future crises, Van Hulle says that comparing the two is “a daring exercise. Basel is like an Emmental cheese with holes in, Solvency II is a solid cheese.

“In Solvency II we have considered all risks because insurance is about risk. In that sense I think it is far superior. Plus Basel II was not a Lamfalussy directive. With Solvency II we have a framework directive with implementing measures.”

But it has produced a lot of paperwork. With 60 discussion papers from the Committee of European Insurance & Occupational Pensions Supervisors (CEIOPs) alone this year, it is no wonder that some companies have yet to digest all the information.

Bichard is acutely aware of the paper mountain. He applauds all the consultation undertaken by the commission, but says firms without a specified Solvency II person find it difficult to keep pace.

“It is unbelievably time-consuming. We encourage sub-sectors to get together – as a single company your voice can be just a drop in the ocean.”

Spending time and effort at this stage also adds to the cost but Bichard says: “It is a balance and if there is a lot to do, starting now, allows firms to make gradual changes rather than panic at the end.”