Oldwick, N.J. — The European Commission’s Solvency II directive, slated to take effect in 2012, is expected to substantially increase regulatory capital requirements for most European insurers, despite likely requiring no extra capital for the market as a whole, according to a report from A.M. Best. The Oldwick, N.J.-based global credit rating organization's report "Solvency II May Raise Most EU Insurers’ Regulatory Capital Requirements," is based on the analyses of consolidated results from the third impact study conducted by European insurance regulators.

A.M. Best’s report also describes other implications for the insurance industry, including how the new solvency regime will:

    •    Result in more efficient allocation of capital, enhanced product design and risk-adequate pricing.

    •    Increase the pressure for consolidation, especially among small- to medium-sized insurers.

    •    Likely benefit larger insurers with sophisticated internal models, as internal models are shown to provide for a 15% to 25% lower capital requirement than that by the standard formula of QIS3.

    •    Increase demand for reinsurance, securitization of liabilities and hedging, especially for insurers highly exposed to capital-intensive, long-term products and for smaller insurers using the standard formula for calculating the capital requirement.

    •    Create a risk management-oriented culture, leading to a better capitalized, more efficient and transparent European insurance industry.

    •    Improve the competitiveness of EU insurers, both inside and outside the EU insurance market, although harmonization of EU and non-EU (so-called third countries) regulation and cooperation among these supervisors remains a challenge.

An area of concern is the compatibility of Solvency II provisions with those of the International Financial Reporting Standards (IFRS), which are not yet final. The parallel development of the two standards will possibly result in inconsistencies.

Among the most crucial aspects for the broader success of Solvency II is the clarification of group capital diversification effects related to the non-EU (re)insurers, but this is likely to be a contentious point for the future. The U.S. insurance industry also does not appear convinced that the approach, which combines Solvency II regulation with IFRS, is correct.

Source: Business Wire

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