Cameron weighs in on Solvency II debate

Prime minister David Cameron has slammed Europe’s forthcoming Solvency II legislation as “ill thought-out”, the latest in a string of attacks by high-profile figures.
Cameron’s comments were prompted by Prudential’s threat to leave the UK because of the European regulation. During prime minister’s questions at the House of Commons last Wednesday, Cameron branded the new regime a “good example of ill thought-out EU legislation”.

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He said he feared the new regime would endanger UK business and put the insurance sector at a competitive disadvantage. The government, he said, was “working extremely hard at the European level and with the Prudential” to find a solution.

London mayor Boris Johnson last week wrote to the chief executive of Prudential, vowing to lobby Brussels on the cost implications of the legislation for companies.

Solvency II has also come under fire in recent weeks from ABI director-general Otto Thoresen, who warned that the new rules could disadvantage European insurers.
The criticism has reached EU level, with European Insurance and Occupational Pensions Authority (Eiopa) chairman Gabriel Bernardino last month writing to European commissioner Michel Barnier, complaining that continued delays to the implementation of Solvency II would lead to “the development of national solutions”.

But the commission’s head of insurance and pensions Karel van Hulle this week came out in defence of Solvency II, saying it was developed working closely with all stakeholders, including supervisors and member states, of which the UK is one.

He said Solvency II had been inspired by the UK’s Individual Capital Assessment (ICA) system, introduced in 2006. The reasons behind moving over to the ICA were the same - the need for a risk-based solvency regime.

“That is what today is considered to be the best way to deal with the solvency of insurance companies,” he told Insurance Times.

The debate on Solvency II has heated up since Prudential last month raised concerns that, under the new rules, it would have to hold extra capital against its US operation, Jackson Life. The company said last week it was considering moving its headquarters to Hong Kong to avoid such costs.

Meanwhile, the crisis in the eurozone has raised fresh concerns that Solvency II may destabilise rather than strengthen insurers’ capital bases.

On Friday, Fitch Ratings said that European insurers were able to cope with the writedown on their Greek bonds. Fitch confirmed that the insurers it rates currently hold Greek bonds at around 20% to 25% of their historical/amortised costs and would probably not incur further losses from the debt swap.

Law firm Mayer Brown’s corporate insurance team partner Colin Scagell said that, under Solvency II, government bonds would be rated as safer than other bonds and attract lower capital charges.

But he raised concerns that this would force insurers into investing in them and being exposed to a high degree of risk.

“There appears to be a divergence between the political will to get Solvency II across the finishing line without further delay, and industry experts’ lack of confidence in the risk allocation methodology used for insurers’ investments,” he said.

“There are concerns that the rating agencies’ methodology isn’t keeping pace with the reality of today’s volatile European and global financial markets - and insurers are worried that they will be penalised as a result.

“The uncertainties surrounding the Greek debt swap demonstrates that what is deemed a ‘safer’ risk today may not always remain so. The insurance industry needs reassurance that new regulations can be responsive to the fast-changing economic and political landscape.”

Consultancy firm Kysen account manager Sophie Morrod said: “The drama surrounding Greece’s agreement with major bondholders to avoid a default has shown just how risky - and potentially loss-making - government bonds are.

“But as a perverse effect of the Solvency II regulation, insurers may have their hand forced into making riskier investments in government bonds, since Solvency II gives a zero capital charge to European government bonds.”