Solvency II is a directive created by the European Commission that aims to establish a regime better matched to the risk of European insurers. It also aims to improve the levels of transparency within the industry.
The Financial Times recently explained how beneficial a working knowledge of Solvency II can be, reporting that Consulting Actuaries in particular will be in high-demand until the changes have been implemented.
So, what effect will the new directive have on the UK insurance industry? We’ve answered some of the most important questions below.
1. Will Solvency II ever come into practice?
Assuming the European Parliament’s approval of Omnibus II in September, Solvency II Directive is scheduled to come into effect across the EU from January 1st 2014.
From January 1st 2013, supervisors are being given time to implement the new Solvency II procedures. The ICAS reform framework that was introduced in the UK in 2004 has put the UK in a good position to move over to the new system but more changes will need to be put in place.
2. What will I, as a professional, have to do differently?
The impact of Solvency II will vary depending on your seniority within the organisation. New internal models and working systems for underwriters will be put in place. The new legislation will mostly affect senior management who organise corporate investment, underwriting, product development and financial planning, but the changes will alter day-to-day underwriting practices.
It is likely that all departments will be expected to understand how Solvency II will affect the company’s risk and capital profiles.
3. What will be the burden on insurers?
The directive will apply to all insurance firms with a premium income over €5m or technical provisions in excess of €25m. There will be costs involved in both implementation and maintenance of the systems put in place. Prior approval will need to be sought for insurers to use internal models to calculate regulatory capital and public disclosure requirements.
Insurers will also need to demonstrate their access to expertise on risk management and Actuaries. If companies are found to be non-compliant then the European Commission is likely to take disciplinary action.
4. What will happen to the value of bond ratings?
Solvency II shows favour to those bonds which have good credit ratings and short maturities. This creates an incentive for insurers to allocate their capital accordingly.
In a 2012 report, the Economist Intelligence Unit reported that insurers will need to adjust their capital structure or offer higher compensation yields in order to achieve investment-grade status.
5. Will European firms lose their competitive edge?
Solvency II should protect the interests of policyholders by making firm failure much less likely. It will also reduce the profitability of consumer loss and should prevent market disruption. The FSA claims that it will actually become easier for firms to do business across the EU because it will introduce more consistent requirements.
Insurance solvency is not a simple issue and improvements are constantly being made. However, as Solvency II is a framework directive, it is hoped that it will encourage rather than restrict innovation.