More trouble than its worth

It seems to me that over the last few years no-one outside of the insurance industry has shown much interest in Solvency II–the new EU solvency regime for insurers and reinsurers which is due to come into effect at the end of 2012–apart that is from captive insurer owners. The latter have via FERMA and ECIROA devoted a huge amount of energy to lobbying the European Commission to avoid the additional administrative tasks which Solvency II will introduce and which will generate significant costs, and also to resist the requirement to make a large increase in capital of the captives – once again at enormous cost. As far as I’m aware, the captive owners are having some success.

However, Solvency II presents another issue quite separate from that of captives. And I find it surprising that this has not been given the attention it deserves by brokers and risk managers.

The basic concept behind Solvency II is to protect consumers. It’s a noble ambition – but I don’t believe that we actually need additional protection. The regulations we already have seem to work well. In the recent financial crisis, the insurance industry came through relatively unscathed. Even the problems that arose in the case of AIG (now called Chartis) were not as a result of the company’s underwriting activities.

I wouldn’t say that there were no casualties at all in the insurance industry as a result of the crisis, but the impact on re/insurers was very different to that experienced in the rest of the financial sector. I believe that most insurers have done a decent job in the past in protecting themselves and having enough capital reserves to be able to pay claims to their clients.

What the regulators don’t seem to realise is that claims are very different from investments. In the insurance industry, there is no possibility of the kind of emotive panic reaction that we saw in the banking sector when people were frantically withdrawing their money from the banks to the extent that some went bankrupt. Sure, you get natural catastrophes which generate a large number of claims but generally there is not a mass demand at a single time from policyholders so the risk of an insurer becoming insolvent is much smaller.

Not only do I believe that Solvency II is not justified, or at least misled and will miss its noble objective, I also think it will have a hugely negative impact for insurance buyers. The feedback I’ve received from several insurers suggests that they’re already cutting back in some areas. They’re going to need more capital and there will be less capacity. They’re going to devote more time and resources to administration. At the end of the day, this means that buyers will have to pay more for the same coverage or that coverage is just not available!

There are some insurers who may not be too concerned about this. They have been trying to increase premiums for years but have not succeeded so far apart from in some specialist sectors like aviation and cargo. They may be happy to use Solvency II as an excuse to make the increase that they have been waiting for and that the market has not allowed them to introduce before.

Technically speaking too, insurers are going to struggle when it comes to long tail liability coverages such as decennial liability, employer’s liability/workers’ compensation in so far as this covers industrial diseases, natural catastrophe coverages, product liabilities, professional liabilities etc, where it is not always easy to determine the exact financial reserves to be established. With the additional rules imposed by Solvency II all these types of cover will become much more expensive, even supposing that insurers are prepared to underwrite them.

The outcome of Solvency II is likely to be quite the opposite of the initial aim of protecting the consumer. But few people seem to be prepared to make a conscious effort to resist the new regime.

Despite the fact that higher premiums are hardly in the best interests of their clients, the broking community has remained pretty much silent on the subject of Solvency II. Could this be because higher premiums will mean bigger commission payments?

Although we have attended seminars and discussions with the people involved in drafting the regulations at the European Commission, they don’t seem to listen the point of view of the insurance buyers. They don’t give satisfactory answers to the questions we ask, but just stick to the ‘mantra’ that Solvency II will give better protection for the consumer.

My own feeling is that the regulators are being driven by a kind of pride. They consider that they are developing a unique regime for Europe which will gain attention worldwide and will probably be adopted elsewhere. They are thinking too much about their own image, trying to portray themselves as ground breaking in their efforts to protect insurance buyers. And the rest of the world will have no option but to adopt Solvency II if they want to sell policies in Europe. So risk managers everywhere will see their insurance spend rise and coverage decline.

Carl Leeman is president of the International Federation of Risk and Insurance Management Associations (IFRIMA) and chief risk officer of Katoen Natie
.