No pain, no gain?

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.

Insurance Times joined the scores of insurance professionals converging in the Belgian capital to check the temperature of the Solvency II debate, and found the mood fairly chilly, despite the best efforts of the Commission’s officials to inject a tone of levity.

The day-long hearing showed that many still have deep concerns about the directive, which will provide the framework for the regulation of insurance across the continent for years to come. 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 Koller, 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 for the Commission, said the directive could bring long-term benefits to the industry. But getting there was the problem, he pointed out, particularly because the directive 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. Higher risk customers will lose out, he added: “Pensioners will be disadvantaged, as well as small and medium enterprises who might be dependant on small or mutual insurers.”

But the industry as a whole faces disruption, he said: “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 increase in capital requirements 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 that would have to be raised could undermine profitability and 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. We are still in a financial crisis,” 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. We need to protect policyholders, not supervisors from taking tough decisions,” he said.

Menioux said the specification for Quantitative Impact Study 5 (QIS5) 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.

CEA deputy director-general Alberto Corinti agreed: “If you look at single liabilities, it will be more volatile, but this volatility should not lead to anti-cyclical behaviour by supervisors.”

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.

Ceiops chairman Gabriel Bernardino was a bit more bullish. “Every time there’s a change in regulation, there are opportunities,” he said. “I am sure that the insurance sector will have capacity to develop new products.”

Deloitte’s 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.

Koller cautioned that any such measures needed to be “time limited” and Bernardino told insurers and regulators that another dry run must be avoided – QIS5 had to be the last. “We need to avoid uncertainty; we need to come up with solutions fairly quickly. If we need another exercise, that will create more uncertainty.”

Montalvo said that, once the QIS5 exercise was over later this year, Ceiops aimed to have its updated advice on implementing measures ready by the end of March next year.

Moving forward

Pointing to the sun breaking through the grey Brussels clouds outside the centre, the head of the Commission’s insurance and pensions unit, Karel Van Hulle, commented that the long haul to a new directive was nearly over. “The sun is shining, we are reaching the top of the mountain,” he said.

But the mood inside the room was less sunny. President of the Federation of European Risk Management Associations, Peter den Dekker said that, at a time of such acute economic instability, 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,” he said. “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 sounded a warning: “Uncertainty is something that the European economy doesn’t need at the moment.”

Single rule book for Solvency II?

A single pan-European rule book for Solvency II could be on the cards, according to speakers at the public hearing in Brussels.

Head of the European Commission’s insurance and pensions unit, Karel Van Hulle said: “We want to move to one system of supervisory reporting.”

Ceiops chairman Gabriel Bernardino backed the idea, which would create a level playing field for insurers across the EU. He said: “I am quite positive that a single rule book is very important.”

But Van Hulle acknowledged that regulators needed to know when to rein in their demands. “When do we stop asking for information? If you have too much data, you can kill people with the data.”

The alternative – as secretary-general of the European mutual insurers umbrella body Amice (Association of Mutual Insurers and Insurance Co-operatives in Europe) Gregor Pozniak pointed out – could be “death by 1,000 spreadsheets”.

Where next?

The Solvency II directive itself has been passed by the European parliament. Now regulators and the industry are thrashing out how to implement it.

Ceiops published its advice on how the directive should be implemented last year, which included formulae for how much capital insurers should set aside on their balance sheets.

In April, the European Commission published its draft specification for QIS5, the last of a series of exercises that will model how the directive will work. The results of this exercise will be gathered by Ceiops to help it draw up the measures for implementing Solvency II at the end of 2012. IT