Insurers in the European Union will enter 2016 governed by strict new capital rules to cover worst-case loss scenarios under Solvency II.
The regulation subjects EU insurers to risk-weighted capital charges and additional reporting obligations.
The requirements differ depending on risk levels. Insurers investing into hedge funds must hold 49% in capital of their investment, while those insurance companies with exposure to private equity and OECD listed equities must hold 39%.
The regulation has taken a decade to come into force and the text stands at 3,200 pages long.
The Solvency II capital requirements have already caused a handful of insurers to dis-invest from hedge funds, most notably Storebrand in Norway. However, hedge funds offering separately managed accounts can enable insurers to lower their capital charges.
“If you don’t get Solvency II right, you won’t attract capital to your business,” says Patrick Liedtke, head of Financial Institutions Group for EMEA, BlackRock.
“Those with higher solvency ratios can branch out further and invest in higher returning strategies which carry higher capital charges with them. But for those with lower solvency ratios, this is becoming more difficult as monetary policy, strong demand for quality paper, and financial regulatory reform have contributed to reduced dealer inventories and lower bond turnover, pressuring fixed income liquidity.
“Stricter capital requirements under Solvency II are pushing European and global insurers, particularly those with lower solvency ratios, to increase holdings of investment grade fixed income and diversify under tighter risk budgets.”
Firms will also have to begin reporting their solvency positions in the coming months.
Several industry associations across the EU including the UK’s Investment Association (IA) have developed a standardised template for data reporting by managers to insurers as part of their Solvency Capital Requirement (SCR). Insurers, in turn, are obliged to report this data to national competent authorities. Some managers have expressed alarm that proprietary data could inadvertently be leaked, while others are worried they may struggle to deliver the data within the tight timeframes.
In Global Custodian’s Top 10 Trends for 2016, Arne Jørgensen, domain manager, SimCorp said that “handling these new requirements can be a challenge, not only for portfolio managers, but also for IT departments”.
New Year begins with Solvency II rollout
Insurers in the European Union will enter 2016 governed by strict new capital rules to cover worst-case loss scenarios under Solvency II.