Solvency II Splits U.S. Insurance Industry Into Two Camps
By CYRIL TUOHY, managing editor of Risk & Insurance®
The new global Solvency II capital requirements going into effect at the end of next year have split the U.S. insurance industry into two camps, according to an industry authority.
In one camp reside the multinational carriers generally backing revisions to U.S. capital requirements to make them more closely aligned with global standards. The other camp is made up of those U.S.-domiciled companies opposed to any large-scale revisions to the capital requirements.
If U.S.-domiciled companies are successful in resisting adoption of Solvency II-like regulation and sticking with U.S. statutory capital requirements, they could gain a competitive advantage, according to Howard Mills, chief adviser to Deloitte's insurance practice.
Solvency II requirements are intended to modernize the framework under which insurers and reinsurers operate to give outsiders, ratings agencies, analysts, investors and customers more confidence in the insurance industry's business model.
Developing international standards is seen by many industry leaders, regulators and standards-setting bodies as the best way to promote open global insurance markets while protecting buyers and policyholders.
The Solvency II requirements go into effect on Jan. 1, 2013, and conforming with them is costing the insurance industry hundreds of millions of dollars. Lloyd's has spent $112 million on Solvency II-related issues annually since 2009, and the London market estimates it will have spent as much as $486 million by the time it adopts the requirements. Lloyd's is pressing for a reduction in the amount of capital that insurers must hold against exposure to major disasters.
"It is glaringly obvious the standard formula does not work for global players like Lloyd's," CEO Richard Ward, said recently. "It is too onerously calibrated, particularly in its assumptions around catastrophe risk."
Europe's major insurers are lobbying for breathing room too. Munich Re, for instance, is insisting on a five-year transition period to adopt the new rules. Many insurers and reinsurers have also said that compliance costs are likely to be passed on to buyers in the form of higher rates.
In the short term, the impacts of the requirements on insurers will be felt most by U.S. subsidiaries with parent companies located in the E.U. Impacts will range from a firm's capital position, enterprise risk management programs, product strategy, resources, risk culture and technology, Mills wrote.
Longer term, the requirements on U.S. subsidiaries are expected to alter the way firms institute a risk culture. Day-to-day decisions will be based on a "risk-adjusted basis, with risk exposure being monitored against risk appetite," Mills wrote, in his report titled "Solvency II from a U.S. Perspective."
Mills, the former New York Insurance Superintendent from 2005-2006, also said that Solvency II would have "a very significant impact" in the area of technology as the new regulatory framework will require new technical architectures to analyze risk.
Years of mergers and acquisitions among insurers have left the industry relying on a patchwork of information technology systems stitched across databases. But systems often don't always talk to one another.
"You have to start from the premise that insurance has been plagued by outdated information technology for decades," Mills said, in an interview discussing the report with Risk & Insurance®.
Solvency II requirements are unlikely to ever be adopted in their entirety in the United States, but the National Association of Insurance Commissioners is keen to modernize U.S. capital standards and to push for Solvency II equivalence despite caution voiced by the Property Casualty Insurers Association of America.
March 1, 2011
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