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By CYRIL TUOHY, managing editor of Risk & Insurance®

SCOTTSDALE, ARIZ.- Solvency II, a set of capital requirements designed to modernize the capital framework under which insurers and reinsurers operate, is being delayed as the industry objects to rules they consider costly, onerous and often unnecessary, experts said.

The delays, he said, "generate a greater level of uncertainty about what it's going to mean and how quickly we have to respond."

Solvency II, originally agreed to by the European Union in 2007 as a way to ensure insurers and reinsurers set enough capital aside to pay claims, was scheduled for full implementation by 2013.

It now appears, however, that the earliest Solvency II will be implemented closer to 2015 or possibly even 2016, according to recent reports.

Homan, speaking at the annual conference of the Captive Insurance Companies Association in Scottsdale, Ariz., on Monday, said there was a "greater clouding over where there's support for the Solvency II framework with regard to some European Union nations."

Prudential, one of Britain's largest insurers, in a Feb. 27 website posting, said it is considering moving its headquarters from London to Hong Kong to escape new capital rules for European insurers.

According to a Reuters report, Prudential fears that Solvency II could force it to hold billions of pounds of extra capital against its U.S.-based Jackson National Life unit if Prudential remains domiciled in Europe.

British Prime Minister, David Cameron, in reaction to the news of Prudential's possibly picking up stakes, called Solvency II "a good example of ill thought-out E.U. legislation."

Similarly, Lloyd's estimates it has spent $112 million annually on Solvency II-related issues since 2009. It estimates it will have spent as much as $486 million by the time it finishes adopting the tough capital requirements.

German reinsurance giant Munich Re is insisting on a multiyear transition period to adopt the Solvency II rules in order to gain a bit of breathing room.

"Where Solvency II is applied, capital requirements will go up and go up significantly," Homan said. The more capital a company needs to the put aside, the less it has available to grow and underwrite new risks.

U.S. insurance carriers, governed by state regulations, are not under the same capital requirements as European insurers and reinsurers.

Nor are Bermuda-based insurers and reinsurers, though Bermuda has opted for a Solvency II equivalency framework to ensure reinsurers have enough capital to pay claims.

Shelby Weldon, insurance director with the Bermuda Monetary Authority, said that Bermuda's strategy to follow an equivalency strategy was "a key development" from the Bermuda perspective. Bermuda, with 862 licensed captives at the end of 2011, is the world's No. 1 captive domicile.

"Bermuda has always understood that there's a need for some risk-based supervision," Weldon said.

Homan also said that any company operating in a country governed by the Solvency II directive will find its capital requirements going up. As a result, many multinational companies are developing expensive internal capital models along parallel tracks to Solvency II.

In addition, small niche underwriters and mutual insurers are likely to face consolidation, as they are doing in France, Homan said.

In a report published last year, Howard Mills, chief adviser to Deloitte's insurance practice, wrote that U.S.-domiciled insurance companies, which are not under Solvency II requirements, could gain a competitive advantage against European-based carriers.

In the short term, the impacts of Solvency II requirements on insurers will be felt most by U.S. subsidiaries with parent companies located in the EU.

Impacts will range from a firm's capital position, enterprise risk management programs, product strategy, resources, risk culture and technology, Mills wrote.

March 13, 2012

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