German market in uproar over Solvency II

Solvency II should not be a problem for the country’s risk managers. But they are affected by the EU’s new rulebook, too as large customers of the insurance industry and as owners of captives.

Problems with captives are especially being felt by companies. The fifth Quantitative Impact Study or QIS 5, as EU jargon calls the test run, has been far from reassuring for captive owners.

“We have to report as if we were an insurance group,” complained Hans-Jürgen Allerdissen, director of Deutscher Verkehrs-Assekuranz-Vermittlungs-GmbH, the risk management company and captive broker of Deutsche Bahn. “The effort needed is greater than what we can achieve.”

Because of the lack of in-house capacity, captive owners have had to ask external experts like Marsh, Willis or PriceWaterhouseCoopers to compile all the data requested by the supervisors. “This costs a lot of money,” said Mr Allerdissen. He finds it absurd that captives have to fulfil such requirements. “We are only insuring our parent company. No external customers will be adversely affected, if a captive becomes insolvent,” he said.

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Deutsche Bahn owns four captives. “If Solvency II stays as it is now, we will have to think about new structures,” he said. Captives may have to be merged or several captives could have to be managed under the same roof.

Together with fellow heavyweights Deutsche Bank, Evonik Degussa, EADS and Arcelor Mittal, Deutsche Bahn founded the European Captive Insurance and Reinsurance Owner’s Association (ECIROA).

The association is lobbying for a reduction of the capital and reporting requirements for captives – so far with mixed results. “The EU has realised that a captive’s activities differ from the activities of a normal insurer and promised to ease regulations. But there are no details yet,” Mr Allerdissen said.

And the worries are not limited to the captive problem. Mr Allerdissen believes that the new rules will be used for a sweeping restructure of the market. “I can’t help but think that large insurers and reinsurers want to use Solvency II to gain business,” he said.

Risk managers hate losing capacity in a market, even if it is provided by small and medium-sized insurers. In Germany, as elsewhere in Europe, it is feared that two or three large companies might dominate the market dictate prices and terms.

The same fear of a market consolidation has led managers of some German insurers to plot open uproar against the leadership of their association, Gesamtverband Deutscher Versicherungswirtschaft (GDV).

GDV, under its president Rolf-Peter Hoenen, has for years been an advocate of the planned new capital adequacy system. “The idea of Solvency II is still the right one,” he said in Berlin. But he also voiced some criticism: Mr Hoenen asked Brussels for a significant reduction in the reporting requirements as well as a change in the yield curve for life insurance. In the current version, the formula could lead to an end of the German life insurance model with long-term interest rate guarantees.

Mr Hoenen is manoeuvring in very difficult waters, and he is trying to keep a lid on a sharp internal disagreement about the new regulations. Those in favour of Solvency II do not want to rock the boat, but it also seems as if critics are afraid that an open argument would lessen the chances of a relaxation of the rules through the EU.

Behind closed doors, though, things are different. During last week’s annual GDV conference, Germany’s insurance mutuals met. Here, considerable criticism was voiced.

Three insurers even tried to introduce a resolution in which Solvency II in its present form would be declared ‘a failure’. The chairman of the meeting, Gothaer’s Werner Görg, was able with considerable difficulty to avoid a vote and to postpone the subject to an extraordinary meeting to take place in January.

“The mood was extremely hot-tempered,” a participant reported. The three insurers are well-known Gartenbauversicherung, a small specialised company that insures horticultural farms, Kieler Rückversicherungsverein, a mutual reinsurer, and Alte Leipziger, a medium-sized group with more than €2bn premium income. And the chiefs of the three companies enjoyed considerable support from the floor.

Smaller and medium-sized companies hate the idea of the system. They do not trust the promises made by EU representatives and insurance supervisors that things will be simplified during the run-up to the introduction in 2013.

Their main fear is that large insurers will use Solvency II to force market consolidation. Mr Hoenen of the GDV denies that, as do Allianz and others. But, Helmut Perlet, former chief financial officer of Europe’s largest insurer and one of the architects of Solvency II recently cast doubt upon these claims.

“We will have a trend towards market consolidation,” he told a conference in Cologne on 29 October. “Internal risk models are expensive, and many insurers will not be able to come up with that money. Internal models allow insurers to work with less capital than those using the standard model. Diversification effects will in future play a far bigger role. This will certainly lead to more consolidation,” Mr Perlet continued.