Time to simplify Solvency II say regulators and insurers

They also expressed their support for the implementation of transition measures to allow insurers to adapt their business to the new capital requirements, although they rejected the idea that this period could extent to as long ten years.

Speaking at the second European conference on Solvency II, organised by Federation Française des Societés d’Assurance, FFSA, France’s insurance association, Karel van Hulle, the top insurance man at the European Commission and architect of the new capital adequacy and reporting regime, said that ‘we have to make an effort to simplify’ the standard formula of Solvency II.

He stated that the formula, in its current form, has become ‘too complex’ and that measures to make it simpler are being analysed by the legislators.

Insurers have complained that Solvency II threatens to impose a huge burden on their costs because of extra red tape. For their part risk managers have expressed fears that the excessive complexity of the directive could drive smaller and specialist insurers out of the market.

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But Mr Van Hulle remarked that the authorities are keen on maintaining competition in the market. “We don’t want Solvency II to become a trigger of consolidation in the insurance industry,” he said. “We want choice.”

A number of member states of the European Union, among them France, have already submitted ideas to simplify the standard formula, which are currently under consideration, he pointed out. “We must not have regulation in excess, but only what is adequate to the sector’s needs,” stressed Mr Van Hulle, who is the Head of Unit, Insurance and Pensions, Financial Institutions, Internal Market Directorate General at the European Commission.

“We need to reassess the level of complexity (of the standard formula)”, agreed Gabriel Bernardino, the chair of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). “The standard formula is perhaps too complex in some areas.” He said that simplification would be particularly welcomed by small and medium companies that have more problems adapting to the current requirements.

The CEIOPS chair also stressed during the conference that the transition period for insurers to completely fulfill the new requirements is an important issue that needs to be negotiated carefully. “We all know that you cannot change just like this,” he told the insurers present in the audience. “And this is true not only for the insurance industry, but also for the supervisors too.”

Mr. Bernardino said he agreed with the view that a three year-transition may create too tight a deadline for insurers, but also said that a ten year gap, as has been proposed by some, is too long. “The solution is probably somewhere in the middle,” he said.

For his part, Michel Barnier, the European Commissioner for Internal Markets and Services, also supported measures to simplify the directive, and to smooth transition to the new requirements for insurers.

He pledged that Solvency II will not hinder the ability of insurance buyers to find the products they need at reasonable prices. “The directive has to boost competition, which should have a positive effect on prices and also on the choice of products for insurance clients,” Mr Barnier said in a video link during the conference.

He stressed that Solvency II must increase the competitiveness of the European insurance industry. “It must not punish any insurance company because of its size or legal status,” he said. The commissioner also presented his view that the directive will enable insurance companies to allocate capital in a more efficient way in the future, which should bring further benefits to the industry and to the European economy as a whole.

Insurers who spoke at the event, although keen to point out the benefits that Solvency II will bring to the industry, insisted that overcomplicating the regulations could cause as much harm as good.

For instance, the chairman of FFSA, Bernard Spitz, opened the debate by warning on the risks of a heavy-handed regulation on the insurance industry. “Hyper-regulation would generate hyper-costs,” he said, echoing similar fears of other insurers on the effect of the new regulation on premium prices.

Mr Spitz emphasised that, if Solvency II saddles insurers with too many risks, not only will their costs rise, but it will threaten their business model in the long run.

“Short termism should not be Europe’s policy,” he warned. Mr Spitz also supported the need to simplify the directive and to come up with transition measures adequate to the current state of the sector.

Jean Azéma, the Chief Executive Officer of insurance company Groupama, stressed that the new capital requirements will put extra pressure on prices and affect the economy as a whole.

“I have to disagree with the commissioner,” he said. “There will be a trend for increases in premium prices. Companies will have to pay more for insurance, and there will be less scope for them to make investments.”

Mr Azéma suggested that Solvency II could also drive insurance companies to look for more money in the capital markets in order to meet stricter capital requirements. “It may reduce the access of other economic sectors to capital, directing it to an industry that maybe doesn’t need to raise so much money today,” he said.

Another consequence, he warned, is that insurers will continue to reduce their investments in equity markets, cutting an important source of funding for French companies. In recent years, investments by French insurers in listed companies have already dropped by €400bn, he said.

The Groupama boss also noted that the new regulations should make clear that European insurers would not find themselves disadvantaged when competing for markets outside the European Union. “Switzerland is in line with Solvency II, but all the other markets are much different,” he said. “We want to make sure we will be able to compete in other markets following their domestic rules.”

Denis Duverne, the Deputy Chief Executive Officer of AXA, pointed out that the eventual implementation of transition measures, although welcome, should not take the focus from the need to calibrate the requirements of Solvency II.

“We are worried that transition measures might be adopted to spread over time the losses caused by poor calibration,” he said. “Transition should be adopted, yes, but for peripheral issues, not to the core of the directive,” said Mr Duverne.

Mr Azéma of Groupama urged regulators not to rush insurers into compliance with the new rules. “Three years is tomorrow,” he said, referring to the transition period originally mooted by legislators.