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Looking back


WHEN ONE IS


NOT ENOUGH As insurers and reinsurers work to put their houses in order in time for the new regulatory regime that Solvency II will bring, Intelligent Insurer looks back to when the original solvency standards were put in place and why a new regime is needed.


I


t has been over 30 years since the EU put in place its original solvency regime during the


1970s, and over that time, the market—along with the risks that companies within the market are willing to take on—has changed considerably.


During the 1990s, it was decided that the


solvency regime for insurers needed further development, and this led to a review of the solvency rules. Following this review, the rules were amended slightly under Directive 2002/13/EC in 2002, leading to a regime that is referred to as Solvency I.


However, it soon became clear that an even


tougher regulatory stance was required. “Solvency I was a rather crude measure of


capitalisation,” says Vasilis Katsipis of A.M. Best Europe Rating Services Limited. “So while on the one hand, it gave you a rough idea of how much capital a company needed, based on its size, it wasn’t sensitive enough to take into account the risks which a company was taking on board.


“While this may have seemed adequate in years gone by, in recent


times, companies have begun to take on more risk, both on their 58 | INTELLIGENT INSURER | October 2011


liability and on their asset side, so it has become clear that the current regulatory regime wasn’t thorough enough.”


Another problem with Solvency I was that it had allowed a kind of regulatory patchwork to develop throughout Europe, making it harder to achieve market consistency, with different European countries adopting different rules.


To rectify this situation, the EU began


working on a regulatory regime, Solvency II, which would at the same time allow for market- consistent balance sheets and a strengthening of risk capital.


However, as with all new regimes, there


would be a number of issues that would have to be resolved.


“The problem which the majority of insurers


are having is that, following the economic crisis, it has become clear that capital requirements have become more conservative and therefore much more onerous for many insurers,” says Katsipis.


This issue of capital requirements has become a topic of hot debate throughout the insurance


worlds, with some questioning as to whether they have been set too high. Although this is a major issue, Katsipis believes that the overall benefits from a stronger regulatory regime will outweigh any short-term inconveniences for insurers.


“Overall, I believe that there is universal


agreement that we need to move away from Solvency I, as it is very crude in comparison with a mechanism that is, if not Solvency II, then something like that which best represents the risks which are being undertaken by the company.”


Judging by the constant disagreements and potential


reports of shifting


of


timetables for the new regime, it seems clear that there is still much work to be done in preparing insurers—and their regulators—for Solvency II.


However, given the significant role that an


effective insurance industry plays in maintaining the fabric of modern society, it would appear that any trials and tribulations encountered along the way to ensuring the security and future of that insurance industry will be well worth the effort.


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