‘The insurance industry will become increasingly important in this risky world but without sound risk management and a risk-based solvency regime, insurers will not be able to deliver’
Further delays to the implementation of Solvency II will compromise the ability of European insurers to deliver protection for their clients in a riskier world, according to Professor Karel Van Hulle.
Speaking at the Ferma Forum, Van Hulle said: “The insurance industry will become increasingly important in this risky world but without sound risk management and a risk-based solvency regime, insurers will not be able to deliver. They will lack the data and tools to know that they can honour their commitments.”
He said that the entry into force of Solvency II is not now likely before 2016, because the failure to agree on Omnibus II – a measure to amend the framework directive for Solvency II – has stalled developments since 2009. A three-way discussion involving the European Parliament and Council and the Commission is intended to resolve the main outstanding issues on Omnibus II in October 2013.
Van Hulle urged these trialogue parties to finish this last step as soon as possible in the interest of all stakeholders. “This is an area where Europe can show leadership,” he told the forum yesterday.
Solvency I, the prudential regime for insurers currently in effect, has important limitations. Van Hulle said, for example, that it does not require insurers to take into account the current low interest rate environment. Nor is it a risk-based approach where there is awareness of the shifting exposures that face the insurance industry.
He highlighted four challenges that make it difficult for insurers to respond to societal demands, including:
- Privatisation of parts of social security including health insurance and long-term care;
- New challenges: pensions, climate change;
- New technologies: will the system function as we have designed it? Will human beings function as planned?
- A continuing role as institutional investors.
Van Hulle said: “The insurance sector is the only major economic sector for which there is so far neither an agreed international accounting standard nor an agreed international solvency framework.”
Ferma president Jorge Luzzi commented: “The continuing delays to the adoption and implementation of Solvency II are already creating uncertainty for captive owners who do not know what capital and reporting requirements they will have in future.”
He added: “Solvency II should make a clear distinction between insurance companies serving the public and captive insurers whose only business comes from their parent companies.
“We are also concerned that Solvency II could result in a reduction in the capacity of the market to cover emerging risks and unusual exposures. We fear that some niche insurers, who provide useful specialist capacity, could find their business no longer attractive once they have to meet the new capital requirements of Solvency II.”
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