As expected, Solvency II is under threat

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26 December 2008
Nicolas Michellod

In April 2008, Celent published a report about the new regulatory approach for insurers and reinsurers operating in the European Union called Solvency II.

Surprisingly or not, the draft text submitted to and approved in the beginning of December by the European Council of Economic and Finance Ministers (ECOFIN) does not contain the group supervision provision any longer. With Solvency II, capital requirement is based on a risk-based system as risk is measured on consistent principles. Knowing that, the removal of the group supervision requirement is an important change to the overall Solvency II regulation. Indeed, the idea behind Solvency II is to encourage large and diversified groups because they can pool their capital resources which should in turn benefits to policyholders. This approach is directly derived from the Basel II regulation implemented for the bank industry.

In other words, it seems that some factors have played an important role during the last six-month period and led the policy makers to reconsider the pros and cons of the group supervision provision. First of all, a few internationally diversified banks have nearly collapsed in the recent past demonstrating that the Basel II regulation could not prevent even well-diversified institutions from experiencing solvency problems. In the insurance sector, the American International Group (AIG) has been seriously hit due to its vast financial exposures that were written at the group level. In addition, after the massive interventions of governments to save some of the biggest European financial institutions, political pressures have emerged. France, for instance, seems to be in favor of the deletion of the group support element of the directive. This decision is also due to the fact that mutuals – which are preponderant in France – tend to have lower solvency ratios and capital requirements. Smaller countries in Eastern Europe are also concerned since they fear losing control over some of the entities. According to a report published by FSA in April 2008 (Enhancing group supervision under Solvency II), foreign insurance subsidiaries own 98.6% of market share in the Slovakian life sector and 100% in the non-life. These figures help us better understand the small Eastern European countries concern.

Overall, the immediate consequence of the ECOFIN decision could trigger new rounds of political discussions and delay the effective implementation of the Solvency II directive. In this context, Celent thinks that 2012 might be a too optimistic objective. However, we still encourage insurers to prepare for the Solvency II implementation because the new set of capital requirement regulation means changes and will trigger new investments anyway.

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