Insurers, like banks, need to hold some capital buffers to ensure that they are able to meet customers’ claims even in adverse economic conditions or in case of unexpectedly large payouts. As for banks, these cushions have often resulted to be too slim. From now on this is expected to change, at least in the European Union. On January 1st, after more than ten years of talks and negotiations, the new set of rules named Solvency 2 has finally come into force, prescribing for all European insurers to follow uniform rules on capital requirements.
As expected, this makes many insurance executives not properly enthusiastic as they point at the ambiguities and inconsistencies within the new rules, at the discrepancies in enforcement and mountains of paperwork as the reasons for their discontent. Such claims seems to be shared by regulators as well: the latest risk weightings seem to excessively penalise long term investments tied to infrastructures while they treat some government bonds as safer than they should be. Moreover, is far from clear how the rules will apply to the international businesses of European banks.
Another hot issue concerns the number of insurers that will be allowed to continue to use their internal models to determine capital requirements. Some big firms, including 19 in Britain, have already persuaded their national regulators that their internal models are at least as good as the uniformed ones. More firms are expected to apply in 2016, eager to retain as much flexibility as possible in the management of their capital. This represents a major threat to the logic of a uniform system, as it will bring the industry back to the comparison of heterogeneous models. Another delicate topic concerns the strictness with which different national regulators will apply the rules: for instance, British and Dutch ones are deemed to be more exacting than their Italian counterparts.
For as many as Solvency 2’s weaknesses may be, the unified regime provides, for the first time, a unique benchmark for the entire European Union. It will clarify which players are stronger and who is weaker. The strong ones will free part of their excess capital and put it to work, or they will redistribute it to their shareholders. For the weak ones, instead a season of great restructuring arises: they will have to increase their capital, trim their liabilities and sell capital-intensive businesses if they want to avoid a combination with their sounder counterparts.
Chiara Cauli
As expected, this makes many insurance executives not properly enthusiastic as they point at the ambiguities and inconsistencies within the new rules, at the discrepancies in enforcement and mountains of paperwork as the reasons for their discontent. Such claims seems to be shared by regulators as well: the latest risk weightings seem to excessively penalise long term investments tied to infrastructures while they treat some government bonds as safer than they should be. Moreover, is far from clear how the rules will apply to the international businesses of European banks.
Another hot issue concerns the number of insurers that will be allowed to continue to use their internal models to determine capital requirements. Some big firms, including 19 in Britain, have already persuaded their national regulators that their internal models are at least as good as the uniformed ones. More firms are expected to apply in 2016, eager to retain as much flexibility as possible in the management of their capital. This represents a major threat to the logic of a uniform system, as it will bring the industry back to the comparison of heterogeneous models. Another delicate topic concerns the strictness with which different national regulators will apply the rules: for instance, British and Dutch ones are deemed to be more exacting than their Italian counterparts.
For as many as Solvency 2’s weaknesses may be, the unified regime provides, for the first time, a unique benchmark for the entire European Union. It will clarify which players are stronger and who is weaker. The strong ones will free part of their excess capital and put it to work, or they will redistribute it to their shareholders. For the weak ones, instead a season of great restructuring arises: they will have to increase their capital, trim their liabilities and sell capital-intensive businesses if they want to avoid a combination with their sounder counterparts.
Chiara Cauli