The Potential Implications

of Solvency II

Solvency II will have far-reaching consequences not only for insurers but also for the capital market.

Insurers, pension funds, and consultants have been anticipating the implementation of Solvency II for some time. In brief, Solvency II demands a more comprehensive risk management framework and higher capital requirements for European insurers.

The introduction of Solvency II, initially planned for January 2013 but likely to be delayed, is intended to make insurers more stable and protect policyholders. Insurers taking on greater risks will also be required to hold more capital. The implementation will have significant repercussions for insurers, necessitating substantial changes. UK regulators estimate that the costs of implementation in the UK alone will exceed £2 billion, with an additional £250 million annually for compliance costs for insurers.

Major insurers welcome the increased investment and attention to risk management activities. However, smaller insurers may struggle to meet the capital requirements and stricter risk management standards. Consequently, a BASIC version of the directive has been introduced. The question remains as to how the regulator will handle this.

There is also criticism of the stricter requirements, particularly regarding who will bear the costs of this transition—will it be the policyholders?

The portfolios of insurers will change, with the new rules discouraging risky investments such as equities and private equity. With the current low-interest rates, there is uncertainty about whether sufficient income can be generated in the future. Banks will also be affected by the stricter requirements, as they are significant investors in insurers.

If the business and risk models of insurers show strong similarities, there could be simultaneous buying and selling of stocks, potentially leading to significant market fluctuations, according to a major European insurer.

Additionally, the competitive position relative to other countries may deteriorate, especially if the United States does not implement similar measures to Solvency II, as noted by another major European insurer. However, an insurance market characterised by great stability and certainty, partly due to Solvency II, could also derive competitive advantage from this development.