EU Insurers Still Coming to Terms with Solvency II as Start Date Nears

“Over the next 18 months it’s estimated that Ireland will spend 100 million euros (app. $125 million) on preparations for Solvency II (SII),” said Garvan O’Neill, a partner in PricewaterhouseCoopers’ financial services practice, who headed a panel discussion on the pending regulations at the European Insurance Forum in Dublin.

EU insurers have been faced with complying with the multiple mandates of SII for nearly 10 years, and there’s still a great deal to be done, as over the next 18 months insurers “convert theory to practice, assess the impact [of SII] on their business and embed risk management procedures,” O’Neill said.

The date for at least the implementation of SII’s first two “pillars” – imposition of capital models more aligned with levels of risk, and greatly extended risk management requirements – are now set to go into effect as of January 2014. The third pillar – increased transparency and reporting – will be phased in more gradually.

The task of rewriting the regulations governing EU insurers has proven to be far more difficult than originally foreseen. Shirley Beglinger, a former managing director at Swiss Re, who has written widely on the subject, explained that SII is “basically addressed to the life insurance industry, as P&C (or non-life) is ‘too difficult’ for them [regulators] to understand.” The rules “were written as the financial world was blowing up,” she added. They “anticipate a worst case scenario.” The life insurers were the principal driving force – through batteries of actuaries, accountants and lawyers – who shaped the Solvency II regulations.

As it happened P&C insurers – AIG excepted – weathered the financial crisis of 2008-09 rather well. They didn’t exactly prosper, but almost none in the industry were forced into runoff, or had to raise large amounts of fresh capital. But once politicians and regulators start a project, they’re generally incapable of letting it drop, even if the reason for it, as far as the P&C industry is concerned, has greatly diminished. 

So far SII’s most profound effect has been to force the adoption of information technology systems. “There’s been a tenfold increase in the number of data points required to be monitored,” O’Neill said, and “you can’t do it manually, as they must be accurate, so you need information technology.”

Acquiring that technology and employing the people who can manage it costs money. While larger companies, who already have IT systems and sophisticated capital models, can integrate the data required by SII fairly easily, smaller companies, especially small mutuals in France and Germany, will find compliance very expensive. It also raises the costs for captives, unless they can work out a deal for “proportionality,” i.e. a lighter regulatory burden.

Senior executives, especially senior actuaries, chief risk officers and board members, will be required to play a greater role in how their firms are managed, and how they comply with SII’s requirements.

“Companies have already changed,” said one panel participant, Colm Fagan, who has a wealth of experience in that regard. He is a Director of a number of insurance and reinsurance companies and chairs the risk committees of two life insurers and one reinsurer. He is also credited with attracting over 30 major financial groups to establish international life insurance companies in Dublin, and is a Fellow of the UK Institute of Actuaries and a former President of the Society of Actuaries in Ireland. Fagan is currently a member of the Taoiseach’s (Irish Prime Minister’s) International Insurance Group and of its Solvency II Group.