Solvency II has finally been agreed – but only as a framework directive. Now the industry has just three years to implement the changes. We asked four industry figures for their views on that timetable.
Guy Soussan says the industry still can have a say in the new regime’s final shape
Regulatory fatigue seems to have to set in and the agreed text of Solvency II still needs to be formally approved. So there is time for the sector to take stock. Attention also has shifted to the new regulatory agenda the European Commission is proposing as a response to the financial crisis.
However, the industry needs to remember that Solvency II is a framework directive and therefore sets high-level principles.
So-called level two measures will implement Solvency II principles; supervisory guidelines – level three – will complete the package. The commission has announced that these additional measures must be in place by October 2011 to allow member states to implement the new solvency regime into national law.
The level two measures will be a complex and difficult exercise. Although the commission is ultimately in charge of drafting and adopting them, it must consult the Committee of European Insurance Supervisors (CEIOPS), member states and the European Parliament.
A number of policy issues and options remain in the commission’s hands, which will ultimately influence the final shape of the new regime. Continued industry input is critical in order to help the commission to adopt measures that are realistic and proportionate. This is not the moment for the industry to down tools.
Guy Soussan is a partner in the EU regulatory insurance team of Steptoe & Johnson LLP’s Brussels office
Charl Cronje warns the devil is in the detail – and that detail is becoming massive
Solvency II is an ambitious, idealistic regulatory regime. The principles are laudable and many of the requirements are just good business practice. But the devil is in the detail and the detail is becoming massive. It will require a substantial ongoing investment of resources and senior management time.
The best thing insurers can do now (if they have not done so already) is to get a handle on the size of the new statutory capital requirement and to develop the ability to track this figure over time. This essential check will focus minds on the many changes required within the business to cope with a new kind of regulation.
Naturally, insurers will want to look at ways of reducing the capital requirement, either through risk mitigation or through better quality modelling of risks.
A key concern will be that they do not get forced down the route of the Standard Formula for solvency, which may be penal and restrictive. To gain approval to use their own internal capital model instead, insurers will need to start planning now so they can meet some stringent tests.
Regulators will have limited resources for assessing internal models and those who find themselves too far back in the queue may well fail to get their models approved in time for 31 October 2012.
Charl Cronje is a partner in the insurance consulting practice at actuaries and consultants Lane Clark & Peacock LLP
Martin Albers foresees beneficial changes in the way insurers buy reinsurance
The fundamental elements of an economic and risk-adjusted view of the capital environment are on course – even though items such as group support have not yet been adopted by the European Union.
So, what will change from the perspective of cedants?
Under Solvency II, the internal view of economic capital will become virtually identical to the regulatory capital requirements. This is a positive step. Clients are already starting to optimise their businesses along these lines and this may lead to a restructuring of reinsurance programmes.
The new regulation also will change the way insurers steer their businesses. First, there will be a move away from focusing on issues such as profit and loss volatility, accounting volatility and budget. Instead of buying to budget, clients will consider reinsurance from the perspective of risk and capital.
Second, the economic effects of reinsurance will have a more immediate impact on the solvency capital requirement.
The cost of capital is a crucial element in managing shareholder value. Solvency II will bring greater transparency in terms of what capital is being used in which lines of business and for what return.
With a clearer view on its value in lowering the cost of capital, chief risk officers and financial officers will be far more interested in the benefits of reinsurance and have better measures for judging the value of the coverage they buy.
Martin Albers is an executive board member of Swiss Re
Juliette Winter says Solvency II means rethinking strategic management of prior year liabilities
Insurers and reinsurers must consider the potential capital implications of Solvency II. Not only will it create greater transparency, but it is also likely to require increased capital to support specific elements of business, including liabilities in run-off.
On the plus side, this focus should result in more efficient businesses, which will complement the growing focus of shareholders on cycle management and returns on equity. However, it is also coming at a time when availability of capital is at a premium.
In business terms 2011 and 2012 are not that far away. Indeed, many forward-thinking insurers and reinsurers have been working for some time to bring their businesses into line with the expected provisions of Solvency II.
As part of this process, various underwriting entities also have been consolidating and streamlining old year liabilities – whether discontinued business or mature tails on continuing books – in their drives to achieve capital and cost efficiencies.
This is a significant first step. The next will be when underwriting entities en masse start to focus on the potential to turn liabilities into assets by selling portfolios to third party specialists, a process that is already starting.
As such, Solvency II could well turn out to be the catalyst for a significant shift in strategic thinking on prior year liabilities, a shift that many would argue is long overdue.
Juliette Winter is a director of Ruxley Ventures