market update: solvency ii
WITH THe eURoPeAn LAUnCH oF SoLvenCY II set for the
end of 2012, companies in both the United States and europe are
scrambling to create Solvency II departments, bring on Solvency II
experts, and redefine their overall risk systems.
Solvency II is the updated set of regulatory requirements for insurance firms that
operate in the European Union. Based on
Basel II, which regulates the banking industry and other financial institutions in
Europe, Solvency II has been referred to as
“Basel for insurers.” There are similarities,
although Solvency II has been expanded to
fit the insurance industry and puts a greater
emphasis on enterprise risk management.
Its ultimate goal is to create a single market
for insurance services in Europe.
While it may appear that Solvency II
is taking shape only in Europe, all companies in the United States that have a
European parent will be affected. And
there’s not a lot of time to create a single
market—based on economic principles to
measure assets and liabilities—for insurance services in Europe. As a result, many
U.S. actuaries are being called upon to assist their companies in creating adequate
operational policies as the European implementation moves forward.
grow. The transparency demanded by
Solvency II, coupled with the cost of
implementing a new and comprehensive reform, is likely to give rise to a
demand for actuaries who specialize in
mergers and acquisitions.
Other observers believe that Solvency II could bring about a hard market.
Companies will have to be more strategic in their approach, according to John
Neal, chief underwriting officer of QBE’s
European operations, who was quoted in
the U. K.’s insurance weekly POSTonline.
“The way insurers allocate risk
will mean they have to be a lot more
intelligent in the way they deploy by
distribution channel, geography, and
product,” Neal said. “That could po-
tentially be a catalyst for driving us to
a hard market.”
A divergent view from the European
insurance and reinsurance federa-
tion (CEA) suggests there
A New model
The insurance industry always has
worked diligently to regulate and improve solvency requirements so as to
protect the strength of its companies.
The initial body of requirements (
Solvency I) was formulated in the 1970s. A
great deal has changed since then, not
only with the complexity of the financial
and insurance industries but also with
access to data, improved technology, and
the ability to regulate in a more immediate fashion. Although Solvency I still
is in effect—and has done a reasonably
good job of protecting the industry—new
risks have developed that are not covered by the original regulations.
“One could argue that risk
management and economic capital go
hand in hand because you have to have
solid economic capital modeling to have
a strong rating in your overall enterprise
risk management,” said one U.S. actuary
who is an industry expert. His predic-
tion is that companies will be moving
toward a risk-based methodology that
reflects their risk profile. This will re-
quire, naturally, a modernization of each