Solvency II Directive can be Considered the ‘Gold Standard’ in Insurance Regulation, States Timetric

03 Apr 2013 • by Natalie Aster

The Solvency II Directive can be considered the ‘gold standard’ in insurance regulation, as it requires insurers to address all the foreseeable risks that may affect their business structure. It is also being looked upon as a global benchmark in insurance regulation due to its comprehensive scope and structure.

The predominant objective of this new regime is to stonewall the interests of policyholders and ultimate devisees, by adopting risk management at the core of insurance business processes. It also aims to harmonize insurance regulations and consolidate the European insurance market.

According to the report “Assessing Solvency II: Challenges and Opportunities for the Insurance Industry” by Timetric, the shift from Solvency I to Solvency II is not only about calculating capital requirements in a different way but it is also an evolutionary process that requires a change in the behavior of the insurance industry.

Report Details:

Assessing Solvency II: Challenges and Opportunities for the Insurance Industry
Published: March, 2013
Pages: 76
Price: US$ 3,495.00

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 of the products obsolete and unviable.

The structural overhaul 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.

Despite the cost shock to insurers in the short run, if carefully designed and implemented, it will enable firms to analyze product profitability on a consistent and continuous basis. Eventually, it will also uncover many opportunities for cross-selling and expose loopholes in an insurer’s portfolio that can be replaced by new feasible products. Insurers can turn the tide in their favor by indulging in product innovation, re-pricing of current products, diversifying their portfolio, tapping into tax benefits and utilizing the harmonization feature of Solvency II, and changing their business strategies to carefully include mergers and acquisitions (M&A) and other cost optimization activities.

Continuous delays and uncertainties over the final framework and guidelines have created doubts over the credibility of the new regulation. Some market experts have even called the project overambitious in nature. Furthermore, most European countries are not prepared to adopt it fully and the current deadline of 1 January 2014 is expected to be breached again.

Major countries in the American and Asia-Pacific regions are also going through structural changes in their regulations and are observing developments in Europe carefully. Most of the companies operating in these regions will be directly or indirectly affected by the regulation changes in Europe. Although none of the countries have indicated full adoption of the Solvency II regime, most Asia-Pacific countries are moving in the same direction with norms similar to Solvency II already in place or proposals to do so.

More information can be found in the report “Assessing Solvency II: Challenges and Opportunities for the Insurance Industry” by Timetric.

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