Solvency II – The Gold Standard?

Majority of European insurers are ill prepared for the looming deadline for the implementation of Solvency II.

Although the shift from Solvency I to II – the new ‘gold standard’ in insurance regulation – is beset by significant short term challenges, it presents a number of opportunities to those insurers capable of carefully designed and implemented application. However, continuous delays and uncertainties over the final framework have created doubts over the credibility of the new regulation, with some market experts labelling the project as overambitious. This is a claim bolstered by the fact that most European countries are not prepared to fully adopt it, suggesting the current deadline of January 1st 2014 will slip again.

The Main Features of Solvency II

The Solvency II Directive, which is being viewed as a global benchmark in insurance regulation thanks to its comprehensive scope and structure, requires insurers to address all foreseeable risks that might affect their business structure. The predominant objectives of this regime are to safeguard the interests of policyholders by enshrining risk management at the heart of business practices, harmonise insurance regulations, and consolidate the European insurance market.

Implementation Marred by Uncertainty

Despite the rapidly approaching deadline of 1st January 2014 for implementation, quantitative surveys conducted by the European Insurance and Occupational Pensions Authority suggest that most insurance firms are not prepared for full adoption of Solvency II regulations. Whilst Western Europe, led by the UK and Spain, has made progress towards readiness, the generally poor state of preparedness across Europe has led some market experts to label the project as overambitious in nature. This assertion is lent credence by the high likelihood that the current deadline for implementation is likely to be breached once again.

Impact on Key Insurance Sections

The short-term impact on life and general insurance business is likely to be negative. Significant capital charges for risky and volatile assets with high yields are expected to drive changes in investment policies. Sovereign bonds will gain more exposure and replace high capital charge assets, rendering some products obsolete and unviable.

Challenges of Solvency II Requirements

The structural overhaul of Solvency II poses significant challenges for insurance industries and regulators, in terms of resources, time and money. The complex nature of calculating solvency capital requirements, marketing consistent treatment of balance sheet items and integrating risk management in central business processes will exert immense pressure on the current structure, and will increase the cost of specialists required to handle business models efficiently and in compliance with the new norms. It will also require reliable data and IT infrastructure, adding further pressure on company resources and budgets.