AIRMIC warns Commission Solvency II ‘out of all proportion’

The latest advice provided to the European Commission by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) on the new system will significantly increase the amount of capital needed by insurers to underwrite corporate insurance and most other lines.

CEIOPS has diluted its advice compared with its recommendations provided at the end of last year. But it still represents a significant toughening over what the market expected earlier last year after it carried out its first major field test QIS4.

The Committee states that the rules need to be toughened in light of the stress placed on balance sheets by the recent credit crisis and economic downturn.

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FERMA is worried that the tougher capital requirements will lead to a reduction in capacity for corporate insurance buyers and an increase in prices for no good reason.

The federation and insurer representative bodies such as the Comité Européen des Assurances (CEA) and Geneva Association say that CEIOPS has missed the point because the insurance industry generally did not suffer the same fate as the banks during the credit crisis and does not represent the same systemic risk threat that would justify a significant toughening of capital requirements.

The federation has therefore advised its member associations to lobby their national governments and finance ministries and explain why the tougher capital requirements for insurers are not relevant.

In a statement issued earlier this week AIRMIC warned that if capacity falls and prices increase as a result of Solvency II then companies will simply have less money to invest in their businesses and would buy less insurance, leaving them more exposed to big losses.

AIRMIC reiterated its support for the original principles of Solvency II. But, it said that the reform has ‘strayed’from its original mission and if applied as CEIOPS advises will impose burdens on the sector that are ‘out of all proportion’ to the problems it intended to tackle.

“The sharp increase in capital requirements for insurance companies under Solvency II means that there will be less choice of insurance, less flexibility and greater cost. Insurance companies do not pose a systemic risk to the economy and, unlike many banks, they have not been found wanting in the recent financial crisis,” said John Hurrell, Chief Executive at AIRMIC.

“Our members are concerned that they’re going to take a lot of pain for very little gain when buying insurance for their organisations. There’s a feeling that the E.U. is addressing a problem that doesn’t exist.”

Mr. Hurrell also stressed the dangers posed by Solvency II to captives. The original Solvency II Framework Directive said that captives should receive lighter treatment than commercial insurance companies because they perform a different role.

But, CEIOPS’ latest advice to the Commission places such strict restrictions on how the lighter, or proportional, treatment would be obtained that this concession has become virtually worthless, argue insurance manager representatives.

“Captives are a valuable tool that help to improve risk management and reduce the cost of insurance, but Solvency II would make them more expensive to run and far more bureaucratic,” he said.

“I would urge the E.U. to return to basics and the original intentions of Solvency II, which was to ensure that insurers are well run, transparent and sufficiently well capitalised for the risks that they carry,” he added.

AIRMIC’s statement echoed comments made a week earlier by Kerrie Kelly, Director General of the Association of British Insurers, who described the development of Solvency II as ‘intensely frustrating’ during a recent speech she made at the annual Financial Services Authority Insurance Sector Conference.

“It remains intensely frustrating that what was originally a sensible and well considered directive, designed to assist the smooth operation of the single market by delivering a common risk-based regime of capital requirements and supervision has instead become a vehicle for European regulators to require layer upon layer of additional capital. In doing so, they ignore the fundamental risk-based approach of the Directive and the need to recognise the social and economic value of insurance products that are accessible and affordable – points which I know are now emerging in the Commission’s impact assessment work,” said Ms. Kelly.

“These points are also echoed in the recent CEA report which highlighted the consequences of excessive capitalisation of the industry and how it would hit customers and investors hard in both the life and general insurance markets. These proposals are now being scrutinised very closely by the European Commission and it is essential that everyone – ABI, industry members and those FSA and Treasury officials representing the U.K. – support the Commission in pushing back against the extreme conservatism of the CEIOPS advice to ensure common sense prevails,” she continued.