‘Solvency II must change’

See analysis: Return to solvency

AXA Insurance chief executive Philippe Maso has warned that the plan to overhaul regulation of European insurers must be revisited in the wake of the global financial turmoil.

As governments scrambled to nationalise banks and financial services stocks began to rally this week, Maso questioned the accounting rules that form a key plank of Solvency II, the European directive on insurers’ capital adequacy due to come into force in 2012.

Under the rules, an insurer’s assets will be given a market valuation at any given point in time, but Maso said this was not fair because valuations could be artificially low at times of market turmoil. Insurers would have to hold on to more money to meet potential claims, or risk being declared insolvent.

Speaking at the Insurance Times Commercial Lines Forum, Decoding a Competitive Future, Maso said recent events showed the legislation had to be more flexible.

He said: “We need mechanisms to avoid downward spirals. There is a pot of money and, if the markets go down, that pot of money can be run down to zero or even to a negative figure. No one knows where the market is going to land.”

Leading analysts agreed that the financial meltdown had turned the spotlight on Solvency II. Peter Courtney, head of insurance at consultancy Accenture, said: “It’s up in the air – as the whole financial services landscape pans out and we see what kind of regulatory landscape will be put in place, it would be totally sensible for Solvency II to be reconsidered.”

Peter Skinner, the MEP in charge of steering the directive through the European parliament, acknowledged the concerns but said Solvency II was still the best tool.

“I’m not blind to these concerns, but there are ways of dealing with cyclical issues caused by market turbulence. But these have to be before the local supervisor [the FSA in England] rather than within the [Solvency II] directive,” he said.

The FSA said it had no plans to alter the implementation of Solvency II in the UK.

Also speaking at the Insurance Times forum in London on Monday, Tim Edwards from the FSA’s wholesale and prudential policy team said firms should identify the key person managing Solvency II and detail how they will cope with implementation.

Maso added that he still supported Solvency II as a risk management framework.