Solvency II Where are You?
A pop quiz. (1) What is Solvency II (SII)? (2) When will it come into force? (3) Does anyone other than EIOPA think it's a good idea? (4) What is EIOPA? (5) Essay question: Why is regulation, in this case, so apparently impossible to create and enforce? Answers:
(1) Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry and an attempt to harmonize insurance regulation across Europe. (Let's ignore the fact that Europe isn't a jurisdiction, or a coherent political unit, or anything other than a byword for red tape and a hollow joke.)
(2) No one knows when SII will be introduced. It was supposed to happen a couple of years ago, then a couple of months ago, now it's maybe next year or the year after that.
(3) The senior executives of every major company I've spoken to say that SII is a good thing in that it has forced a good look at companies' capital. In that it has become a sideshow with ever-changing rules and never-arriving deadlines, it has distracted management, and, like all catastrophes, cost the insurance industry plenty.
(4) EIOPA is the European Insurance and Occupational Pensions Authority. It was called CEIOPS until quite recently. Don't ask. EIOPA is the regulator making such a dog's breakfast of SII.
(5) Why is this happening? What is hard about devising suitable tests to assess an insurance company's financial condition and capital adequacy? It's something we all do, all the time, for our own finances.
Every insurance company files several telephone books' worth of financial data every year with the authorities. A half-way decent accountant with a couple of hours to spare could make up the test. You pass or you fail. If you fail, you raise more capital or you enter into run-off.
So EIOPA must be staffed by idiots. That's a given. The European Parliament is an annuity scheme for politicians who aren't wanted at home. Also a given. The adjectives pointless, sclerotic and insane come to mind when one thinks of the European Parliament, but I digress.
The Occupy Publicity brigade might argue that the big, bad insurance companies have lobbied SII into oblivion. The insurance companies wish they had one-thousandth of one percent of the clout it would take to get the European Parliament to do anything. Or to mean anything. Other conspiracy head cases might suggest that the regulator lacks the courage to introduce SII because the insurance companies will fail the tests. This is only partly true. Some European insurance companies will fail the tests for capital adequacy. They will stop writing business. That is as it should be. Most of the major companies already meet the requirements of SII; end of discussion. Because Europe is an amorphous concept, and because insurance regulators are pig-headed, often by nature, it is possible that a pan-European regime to which the rest of the world must bow down if it wishes to write insurance in Europe will never come into force. Face it kids, SII is like a boil. It hurts. It's unsightly. And eventually it'll go away.
ROGER CROMBIE is a London-based columnist for Risk & Insurance®. He can be reached at email@example.com
April 13, 2012
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