A majority of insurers, financial institutions and corporates surveyed by BNY Mellon believe Solvency II, the directive harmonizing the EUs insurance regulation, misses the mark.
Additionally, 73% surveyed say policyholders will face the cost burden for insurers to comply with the new regulations. Respondents say corporates and individuals may choose to be under-insured as a result, an unintended consequence to the directives aim of ensuring better protection for policyholders against potential insolvency of their insurers.
Solvency II is set to be implemented in January 2014.
The new regulation could disrupt the role of insurers in the capital markets as well, as it forces them to invest in perceived safer assets with lower capital charges and away from equities and non-investment grade debt, BNY Mellon says. Solvency II outlines insurers capital requirements and investment rules, among other things.
“There is an understandable tendency on the part of regulators to focus more on protection than risk-sharing, but that presents the insurance industry with a challenge, says Paul Traynor, head of Insurance, Europe, Middle East & Africa, at BNY Mellon. The public want insurers to fulfill three key roles for society: provide individuals with saving and pension products and to insure them against specific risks; provide corporations with an efficient mechanism to transfer risk; and to be a source of debt and equity capital to industry. However, the survey suggests there is a real concern that the cost of regulation may raise the cost of life cover and annuities, perhaps beyond a tipping point. It also suggests that, as currently calibrated, the regulations will inadvertently crowd out debt and equity capital for industry in favor of EU sovereign debt and unproductive cash holdings. That will make it ever more difficult for insurers to make those positive contributions to society.”
Only 16% of the 254 EU-based respondents said the proposed legislation strikes the right balance when it comes to ensuring insurers have sufficient capital to meet their guarantees, according to BNY Mellon. Insurers and financial institutions (excluding insurers) are more critical of Solvency II, with 55% believing the directive goes too far compared to 39% of corporates (non financial institutions). Fewer than one in five insurance respondents (18%) believe that most insurers are insufficiently capitalized under the present regime.
“A majority of respondents favor an overhaul of insurance regulation in the EU and recognize the importance of the sector to society, says Monica Woodley, senior editor at BNY Mellons Economist Intelligence Unit, which conducted the survey. Indeed, 86% of insurers surveyed believe the industry must contribute positively to society. Our survey findings indicate that, although there is a perception that something should be done to improve the current situation and that harmonization should bring its own benefits, the proposed regime could be seen to be overly cautious. The findings suggest that while the industry welcomes the broad thrust of the regulation, certain calibrations are wrong.”
Insurers are already paying for Solvency II. According to a BNP Paribas survey, insurers are already relying on third parties for risk modeling and other critical data requirements in preparing for the the directive’s requirements.
A number of vendors have released software and platforms to help insurers comply with upcoming Solvency II regulations. BNY Mellon itself has released one — Eagle PACE, which gathers and validates data from insurers and their partners for reporting purposes. Algorithmics has signed up clients for its solution, while Asset Control and SimCorp have integrated Solvency II compliance tools into their solutions.
(CG)