Solvency II may put Europe at a disadvantage, says Savage

The insurance sector might be unfairly balanced after Solvency II is adopted, according to Lloyd’s finance and operations director Luke Savage.

Savage said: “I’m not convinced other countries take European law quite as seriously as we do in the UK,” he said. “Will some of the smaller countries put in place infrastructure and oversight to the same standard as the UK? On paper they should, but in practice if they don’t I’m not sure we will end up levelling the playing field.”

Even if Solvency II is successful in its aims, Savage fears it will just put the whole of Europe at a disadvantage. “If you set that playing field at a level that’s way out of whack with the rest of the world then you end up with a level playing field across Europe and a competitive disadvantage versus the rest of the globe,” he said.

However, Savage said that Lloyd’s is already seeing the benefits of Solvency II despite the delays to its implementation.

Despite this worry, Savage said Lloyd’s is already benefitting from improved modelling and risk reporting as a result of running Solvency II in advance.

Lloyd’s is also reaping the benefits of more concise risk reporting that allows a better understanding of risk compared to previous processes, he said.

“It is a complex business and when you are trying to explain to a board what the risks are it’s actually quite difficult to get across what the things are that should be keeping them awake at night,” Savage said. “Off the back of our Solvency II work we’ve got much better at articulating concisely what risks we care about, why we care about them, how much we will be willing to expose ourselves to them and how that impacts capital.”

Savage insisted that the own risk and solvency assessment (ORSA) requirement of Solvency II has improved decision making and allowed board members to have more information at their fingertips than ever before. “Our board members say it gives them insight and understanding from reading that one document than they have got from years of ploughing through thick board papers,” he said.

Despite being frustrated at the delays being imposed on Solvency II, Lloyd’s insists the benefits outweigh the competitive disadvantage faced by running business under the tighter Solvency II requirements.

“We’ve done the hard work and are now reaping the benefits at relatively low ongoing cost and that puts us into a good position compared to many of our peers,” Savage said. “They have been working on this but not made as much progress as us and therefore aren’t yet reaping the benefits and are still continuing to spend money to get ready.”