Risk and reward

Solvency II, the new Europe-wide directive on insurance regulation, has been broadly welcomed by accountancy firms and insurers. But there were warnings that the rules could lead to sharp premium increases for high-risk policyholders.

The draft framework of the directive was published this week, and is aimed at introducing a common risk-based approach to insurer solvency.

The European Commission says the new system would introduce “more sophisticated solvency requirements” for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods and storms.

PricewaterhouseCoopers said the directive would remove the “patchwork” of insurance regulation across Europe. Deloitte said the move was a “major step” towards establishing a level playing field across Europe.

Insurance giant Aviva backed Solvency II stating that it was a “unique opportunity to create a modern, future-proof insurance supervision framework, for the benefit of policyholders, insurance companies and the wider economy”.

Munich Re hailed the directive as a “milestone” and a “huge step forward” for insurers. “Solvency II is a major EU initiative to fundamentally restructure national supervisory systems for insurance, gearing them more closely to strictly economic, risk-based criteria”.

Beyond the praise, there were also warnings about the high cost of implementation and the potential impact on consumers.

Rick Lester, insurance partner at Deloitte said the new framework generated a number of challenges for insurers trying to adhere to the rules:

"The cost of compliance for insurers is likely to be high with the costs in the UK running into hundreds of millions of pounds. Even for jurisdictions which have accelerated the introduction of risk-based capital for insurers, such as the UK with the Individual Capital Adequacy Standards (ICAS) regime, there is still further work required to address Solvency II."

Lester also noted that there would be “winners and losers” from the new regime – and that consumers could fine themselves paying higher premiums or finding cover to be unaffordable.

He said: "One group of 'winners' from a capital perspective will be those insurers with a diversified portfolio. Monoline businesses will not benefit from capital diversification and this may lead to imbalances in capital supporting similar products across the industry. Such insurers may compensate the lack of diversification benefit in their capital requirements by offering more innovative customer tailored products."

Lester added: "Like monoline insurers, customers may find they are also losers following the introduction of Solvency II. In the short-term the implementation costs of Solvency II may be passed on to customers. However, over time, customers will find they pay even more for the risk being insured. Those with low risk profiles will pay less but those in high-risk areas, such as earthquake or flood zones may find their property becomes uninsurable, or the insurance unaffordable."

Solvency II is due to be implemented by 2012.