LONDON (BestWire) - From now until October, insurance companies operating in the European Union will be working on the next stage of their preparations for Solvency II, which is aimed at introducing a uniform regulatory structure for insurance and reinsurance in October 2012.
"That pre-application process really is designed to help both the insurers and the regulators understand what is required in order to go for the formal application process," said Gerard L'Aimable, a senior consultant with Towers Watson in London.
Consultants, along with the U.K. Financial Services Authority, have been advising companies on their preparations for Solvency II. Insurance companies will be expected to construct internal models and create plans and analyses of their operations. While directives are nothing new in the EU, L'Aimable said Solvency II involves "quite unprecedented" levels of detail and breadth.
Individual company plans will be delivered to national regulators, who will have six months to decide whether they meet statutory requirements. Participation in the pre-application process does not guarantee a company that its plans will be approved. But, in addition to creating valuable momentum, L'Aimable said, "it does mean that there is a proper structured dialogue between the supervisor and the undertaking as to where they are, what needs to be addressed."
John Charles, also a senior consultant at Towers Watson, said the lengthy timetable is intended to give companies the chance to run their businesses before Solvency II actually takes effect.
When clients call Towers Watson looking for help, they are questioned about the analyses they have conducted, L'Aimable said. He said there is some dissatisfaction within the FSA as to how well prepared insurers are for Solvency II. "Documentation is still considered to be an area of additional work," he said. "The method of calculation was an area of major concern."
Skill levels can vary among companies. "I think most insurers have the expertise, but they're not necessarily always getting involved at this stage of the project," L'Aimable said.
The Committee of European Insurance and Occupational Pensions Supervisors is at the center of things through its role as an adviser to the European Commission, the executive arm of the EU. CEIOPS, which is based in Frankfurt, Germany, was established by the European Commission in 2003.
The current phase moves the process closer to the fifth Quantitative Impact Study, or QIS5 -- the latest in a series of Solvency II stress tests on the insurance industry.
Financial services analysts Keefe, Bruyette & Woods said the progress toward QIS5 is encouraging. The European Commission "has effectively overruled" CEIOPS on the issue of capital adequacy, the London office of KBW said in a research note. "We judge this as a constructive step for the European insurance industry."
As awareness of Solvency II increases among companies,preparations extend to such areas as risk management, finance, data and documentation, L'Aimable said.
Charles noted the calls that have been made for implementation of Solvency II to be pushed back. But he discerns a determination from the European Commission to adhere to the deadline.
In March, Karel van Hulle, head of insurance and pensions at the European Commission's Internal Markets and Services division, said in a speech in London that the implementation date will not be delayed. "We are close to the end," van Hulle said in a speech to the Insurance Institute of London. "That is why we have to finish."
Charles also pointed to "some legitimate concerns" about Solvency II capital requirements.
The U.K.-based Association of Insurance and Risk Managers, whose members include buyers of commercial insurance for large corporations, has warned capital requirements growing out of Solvency II could push up premiums by as much as 20%.
"The proposals now relating to the additional capitalization requirements for insurers are now looking as though they're going to be very onerous," John Hurrell, chief executive of Airmic, as the association is widely known, said (BestWire, March 29, 2010).
Charles, who noted what he said was the European Commission's attentiveness to industry, is aware of the issue. "Obviously if the capital requirements increase significantly, it's reasonable to expect that there would be an increased demand for profit margins to be able to finance the additional cost of capital," he said.
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Robert O'Connor covers the U.K. insurance market for A.M. Best Europe. He is a native of the United States and has worked for newspapers on both sides of the Atlantic. He can reached at : Robert.OConnor@ambest.com