‘Ill-adapted’ Solvency II worries reinsurers

While Europe’s reinsurers broadly support the implementation of Solvency II and understand its benefits, there is also disappointment in some quarters that some areas of the legislation flagged up as ill-adapted to reinsurance activity have still not been dealt with, and further improvements are required.

That is the view of Olav Jones, deputy director general of Insurance Europe, the European insurance and reinsurance federation, who also notes that tackling these issues will not be cheap.

“The development of such an ambitious regulatory framework has not been easy and has taken far longer than expected. While the industry continues to support Solvency II and is busy preparing for implementation, there is disappointment that the areas of the standard formula which are ill-adapted to reinsurance activity were not addressed,” he said.

“These issues will now have to be dealt with as part of the ongoing review process, but will cause unnecessary costs and other unintended consequences in the meantime.”

With respect to some of the detail in the Delegated Acts, Jones said Insurance Europe believes some improvements are still required to fully take into account all reinsurance arrangements, and not unnecessarily limit the ability of insurers to use reinsurance optimally.

“One example is currency risk. In its current form, the Solvency II regime encourages insurers and reinsurers not to hold surplus assets in foreign currencies and imposes disproportionately severe capital charges on firms and groups carrying out international business,” Jones said.

“The impact of these measures could be very significant. For example, an EU-headquartered group which has 25 percent of its business in euro and the rest spread around the world in different currencies would see its capital increase unnecessarily by nearly 20 percent.

“Insurance Europe believes that Solvency II should recognise the benefit of insurers and reinsurers keeping funds in local currencies in line with their exposures. It is very appropriate currency risk management, enables faster payments of claims and other transactions, and so should not be penalised.”

Third countries

Jones adds that the issue of third country equivalency under Solvency II also concerns reinsurers. He said this is largely because the political and legal certainty on which countries will be deemed equivalent to Solvency II will not be published in time for companies to include the results in their internal model submissions, which are due by the second quarter of 2015.

“Unless this situation is rectified quickly, EU-headquartered multinational insurance and reinsurance groups face considerable uncertainty in their business and capital planning, and potentially the prospect of having to include multiple different scenarios in their internal model submissions to ensure all eventualities are considered. To avoid this, there is a need for clarity to be provided as soon as possible,” Jones said.

“Overall, Europe’s insurance and reinsurance companies have already invested considerable resources in preparing for Solvency II. More delays will result in further significant and unnecessary costs. This means that any outstanding regulatory and supervisory issues need to be resolved well before January 1, 2016—in practical terms this means early in 2015, at the latest.”

Finally, he notes, there is also a possibility that regulations sometimes have unexpected impacts. He said that, while supporting their aim of providing adequate protection to policyholders, Insurance Europe always encourages policymakers to consider the fact that their decisions on one regulation can have significant consequences elsewhere.

“For example, Europe’s insurers and reinsurers are a prime source of long-term investments, accounting for over half of all institutional investment in Europe. These investments—in government and corporate bonds, as well as other job-creating activities—stimulate growth in Europe’s economy, and so are crucial at a time when that economy is finding it challenging to return to growth,” he said.

“Some aspects of Solvency II, however, will make it more expensive for insurers and reinsurers to make these investments in the future, due to the capital charges it assigns to long-term investments.”