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Because of their size—and therefore limited resources—the cost burden


of Solvency II could be further intensified by the fact that some SME mutuals without the appropriate in-house capacity or expertise will need to enlist outside resources, argues Rick Lester, lead partner of the Solvency II team at accountancy firm Deloitte.


“For SMEs, the cost of complying with Solvency II tends to be


disproportionate relative to their size,” Lester says. “They are encountering significant costs, particularly in instances where they don’t necessarily have the capabilities to prepare for Solvency II internally and require outside contractors and consultants.”


Shaun Tarbuck, chief executive of the International Cooperative and


Mutual Insurance Federation (ICMIF), agrees. He believes some mutuals will struggle to sell the benefits of Solvency II versus the costs to their policy holders.


“It can be difficult to justify the extra spend on one or two actuaries,


who could have a huge effect in terms of the costs involved,” he says. “Whereas a large company could employ 30 additional actuaries and this not affect its cost ratio because of the size of the organisation, in a small company any additional costs have much more significant impacts on profitability.”


SIZE MATTERS This imbalance in the level of costs borne by SMEs has led to accusations


that Solvency II is unfair on SMEs and has been conceived with bigger companies in mind.


While this may be true to a certain extent around items such as costs,


it does not mean that Solvency II is irrelevant to SME mutuals. “The main aim of Solvency II is to bring about a better understanding of risk, and therefore encourage enhanced risk management, with incentives for it. This is applicable to any company, whether large or small, mutual or otherwise,” says Carlos Montalvo, executive director of the European Insurance and Occupational Pensions Authority.


“The second element is a better understanding of the insurance business


and enhanced transparency, which is equally important and applicable to all insurers. We are trying to do this is through Solvency II, which is a risk-based system that determines capital requirements using a standard formula and introduces the possibility of models.


“It could be said that these models were originally intended for large


groups, but this doesn’t mean that this is closed or restricted to them—on the contrary, we are happy to say that a number of small to medium-sized companies are also exploring the possibility of using them.”


Tarbuck emphasises that the primary purpose of Solvency II is to


protect policy holders—the highest proportion of which will be dealing with larger insurers. “Larger organisations dominate in terms of premium income and policy holders, and so represent the largest portion of the market,” he says. “The regulators are there to protect the policy holders, as


30 | INTELLIGENT INSURER | October 2011 But size is not the only factor counting against mutuals. They also have


other characteristics that count against them under the new regulatory regime. One such factor is that many are monoliners—focused only on a single line of business and on long-term lines of business, which are badly taken into account in the new Solvency regime.


While larger, more diverse insurers will benefit from aspects of Solvency


II that reward diversification, many SME mutuals will not, argues Lester. “They will be impacted because they tend to be specialist, niche


players,” he says. “They don’t get the diversification benefits a larger player would potentially receive from writing multiple lines of business, potentially across geographies. This means that they can’t obtain the same kind of capital reductions that a large composite player might be able to secure.”


“ This is a question of policy and tradition in one’s market. One might succeed in telling its members that it is good to keep the funds for more difficult times, another may follow a mutualist doctrine, which means that they constantly plough any profits back to members, through lower prices.”


is Solvency II, so they have to make the majority their main consideration, for obvious reasons.”


While this may be understandable, it provides little comfort to those


SMEs that face a gargantuan struggle in readying themselves for the new regime, argues Marie-Hélène Kennedy, managing director of the Réunion des Organismes d’Assurance Mutuelle (ROAM), a lobbying organisation specifically set up to campaign to warn on potential dangers of Solvency II on behalf of French mutuals.


“Overall, the system might be too much of a burden for them and the


cost of implementation might also be too high for these small to medium- sized mutuals to compete,” she says.


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