This means that some mutuals may be tempted to diversify into other


lines of business. However, this still may not be enough for them to escape increased capital charges, argues Pozniak. “While some mutuals have ventured into other risks, they may still risk being labelled monoline insurers,” he says.


Another problem mutuals face under Solvency II relates to corporate governance structures within their organisations. Mutuals elect


their


board members from within their membership—the model being based on having the members at the heart of the governance.


But this also presents the potential for conflict. Solvency II introduces


new rules around the very high expertise needed on the board of insurers and not all mutuals will have enough expertise to comply as the system is not designed to have professional insurers as board members, argues Kennedy.


“While these elected boards represent the views of all the members,


they are not professional insurers and so if Solvency II demands that the board needs to have the same level of knowledge as a CEO of the company, then it will create an issue,” she says. “Solvency II wants to raise the competence and knowledge of board, which we think is good, but we have to be careful when we do that, by distinguishing between mutuals and joint stock companies. If we do not, we will end up killing that style of mutual governance system.”


A QUESTION OF CAPITAL A key tenant of Solvency II is that of capital requirements, which


again could prove more troublesome for mutuals than for other insurers, particularly because mutuals don’t have traditional shareholders, used to having to make investments, but rather a broad base of policy holders or members, as they are known.


Given that some mutuals could have to raise substantial amounts


of capital in order to comply with the new capital requirements under Solvency II, this will present a problem for some, says Kennedy.


“If you are not careful, they will have to use subordinated debt and


this is a very expensive way for small to medium-sized companies to raise capital,” she says. “For example, many of my members are from tiny mutuals with premiums of only a few million euros per year, and then we have our largest members with premiums of between one and two billion euros every year. For those larger companies, it might be easier, but for those in between, raising capital efficiently, rapidly and at a good cost is going to be almost impossible.”


There will be no last minute rush to raise funds for most, however,


says Pozniak. “This is not a new challenge, which is why a great number of mutuals are already very well capitalised. Their business model does not allow them to raise capital quickly, so they are already well capitalised because they have retained earnings over a long period of time.


“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,” he says.


For some, however, the consequences could be more serious. It is predicted


that some mutuals will find Solvency II so onerous that they will either merge with another insurer to become profitable or shut down completely.


And because many mutuals provide exclusive insurance for one


particular profession, there is a wider risk that such closures could have unintended knock-on effects on professions—some of whom are legally obliged to be insured. This could have far-reaching repercussions should a number of important mutuals go under, argues Kennedy.


“This could lead to catastrophic consequences for policy holders, many


of whom are professionals who rely on the cover which these mutuals provide to their particular profession which enables them to carry on working,” she says.


“Some of ROAM’s members specialise in certain risk, such as doctors or architects’ liabilities, and naturally in these markets they are very important, for example around 60 percent of the French market


“Imagine if the new regulations made those companies disappear: this


would mean that the insured members would not be able to work, either because they would not be able to find coverage or, even if they could find it with another company, it would probably be for a very different price.”


However, everything that can be done to avoid this occurrence is being


done, according to Montalvo, who says that because companies are being given time to adjust to the new regime, there should be no excuse for a healthy mutual, of any size, to go out of business.


“There is also a transitional period that the system is bringing in to


make sure that the scenario in which a company that is perfectly solvent before the deadline and then isn’t afterwards, doesn’t occur,” he says.


While many smaller insurers will be hoping that additional time will be given to them to comply,


the opposite will be true for the


larger insurers, who will find it difficult to accommodate changing deadlines, argues Martin Shaw, chief executive of the Association of Financial Mutuals.


“If you think of a large insurer as a large ship, once a course for that ship is set, it is much harder for it to change course than for a smaller vessel. This is why many of the larger insurers are hoping that Solvency II comes into place in 2013, because that is when they have set their internal models in place for,” he says.


“However, this contrasts with the smaller companies who would benefit


from a delay, because this would give them more time to develop their internal models.”


October 2011 | INTELLIGENT INSURER | 31 for


doctors. Other members specialise in builders’ liabilities and currently have more than 40 percent of the French market.


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