Insurers ill prepared for Solvency II but UK & German p/c segments healthy
But, property casualty insurers in the UK and Germany do appear ready for the capital adequacy-based regime with strong solvency ratios after QIS5 testing.
8% of the simulated insurers in the UK and no simulated German insurers revealed QIS5 solvency ratios of less than 100%, the report says. This is despite the fact that throughout Europe the capital requirements in this segment are due to rise by more than 200% compared to Solvency I.
However, the analysis shows half of Italy’s non-life insurers to have solvency ratios of less than 100% due to an unfavourable product mix.
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At around 50% the share of motor insurance in the Italian property/casualty segment is considerably higher than in the other European markets. And the ratio of total costs to premiums in this fiercely competitive insurance segment in Italy is nearly 110%—burdening equity capital and, by extension, solvency, the report says.
“Our analysis exposes considerable weaknesses in the solvency ratios and risk-adjusted profitability of European insurers under Solvency II,” states Dr Gunther Schwarz, Partner at Bain & Company and Head of the insurance practice group for Europe.
According to the report 25% of German and 21% of British companies have a solvency ratio based on QIS5 of less than 100%. This is largely due to the higher share of long-term annuity insurances in these countries.
And many insurers do not earn their cost of capital, the report continues.
“Companies will have to carry out extensive groundwork to optimise their capital and risk before the new EU regulations are in play,” added Dr Schwarz. “Insurers will also have to realign their corporate strategy, organisation and culture to these new conditions which is a Herculean task.”
According to Naren Persad, Director at Towers Watson, insurers must now take on new strategic challenges. He said: “Solvency II is not just about calculating new ratios. The new regulations call for companies to conduct a widespread business review and, in some cases, to implement completely new processes. The reporting process will have to be industrialised.”
