European insurers would like to see the European Insurance and Occupational Pensions Authority fining regulators where Solvency II is not applied equally across the European Union. This is one of the key findings of The Effects of Solvency II, a White Paper publish today by Post Europe, in association with Atos Origin

1. White Paper
The Effects of
Solvency II
Much has already been written on the topic of Solvency II. What effect is this
quintessentially European initiative having when examined from the
multiple perspectives of the organisations it is impacting across
Europe? Post Europe, in association with Atos Origin, decided to examine
this question in order to see what new light might be shed on the thorny
issue of European insurance regulation.

2. Executive summary
Much has already been written on the topic of Solvency But the insurance industry is putting this thought Contents
II. What effect is this quintessentially European initiative aside while it prepares for Solvency II. The overriding
having when examined from the multiple perspectives of concern is not the regulation itself but whether national 1-2 Executive
the organisations it is impacting across Europe? regulators will truly step up to the challenge. Will the summary
mistakes made in banking regulation be repeated? 3 Key findings
Post Europe, in association with Atos Origin, decided
to examine this question in order to see what new Just how important this is can be seen in the research 4-5 The deal with the
light might be shed on the thorny issue of European we undertook. For example, one executive accepted regulator
insurance regulation. What we discovered is perhaps no that the national regulators were unlikely to apply the
5-8 Extracting the
surprise: A European Union that is still 27 individually Solvency II regulations equally stringently and added benefits
regulated countries bound together with some common that this was one of the biggest risks for the European
purpose but with widely differing regulatory agendas insurance industry. They were not alone. Another said
and challenges. Does Solvency II stand to increase that if the regulation was not applied equally it would 8-10 The problem of
the opportunities for regulatory arbitrage rather than “make a mockery of all the time, energy and money the uncertainty
decrease them as originally intended? Will European insurers and regulators are putting in”.
10-11 Conclusion
regulators step up to the challenge or have they bitten
off more than they can chew? Weakness in regulation?
The national regulators have indeed proved weakness
Conceived prior to the financial crisis of 2008, Solvency in their regulation of a global banking industry. What
II is based on a framework designed to ensure that global is more, it is argued that national regulators like
banks were sufficiently capitalised to withstand the risks the Bank of England know little about regulating
they were running. Clearly recent history has shown insurance companies and may not have the necessary
that this framework failed in its primary objectives. So, skills in depth.
was this failure down to the regulation itself or to the
inability of the regulators to police a global industry? So what makes them believe they will do a better
job of regulating insurers? The banks were clearly
Accepting Solvency II undercapitalised relative to the risks they were running.
From our research it is clear that the European insurers Where is the evidence that the same is true of European
are broadly accepting of Solvency II and getting on insurers? The moves made to create the European
with its implementation. However, most see the 2013 Insurance and Occupational Pensions Authority are
deadline as a stretch target and a number of very real seen as a positive but will it have the resources and clout
concerns still remain. to do the job?
Insurers’ business models are not yet globalised to the Certainly many of the insurance company executives
same extent as the banks. The time horizons of the risks taking part in the research would like to see EIOPA
to which they are exposed and the structural stresses wielding its regulatory power where necessary, stepping
that might lead to systemic collapse, are fundamentally in to adjudicate or even fining national regulators that
different in this sector. do not apply the rules as stringently as their European
Union neighbours.
The insurance industry fared relatively well through the
recent crisis with only a few notable exceptions (which But, just as they would like to see it exert this power,
were arguably behaving more like banks anyway). As a they also accept it may not be possible. Resources have
consequence of this most insurers we spoke to, although already proved a headache for some of the insurers that
getting on with Solvency II compliance, still question took part in the research and many recognise that the
in some way its applicability. For example, one of the shortage of qualified and experienced actuarial and risk
executives who took part in the research said: “It’s not employees will hit the regulators, including EIOPA, too.
an insurance industry crisis, it’s a banking crisis. The This could mean that even if it does have the power to
insurers performed well during the crisis.” enforce the regulations, it may not have the resources
to carry out this role effectively.
THE EFFECTS OF SOLVENCY II APRIL 2011 1

3. Risk management Degree of disquiet
Insurers have been managing insurance risks since For a set of regulations that is only two years away from
the term was invented. The management of risk is implementation, there is also disquiet over the degree
very much part of their businesses. So what difference of fluidity that still exists around some of the rules.
does Solvency II make? It is clear that insurers across This particularly relates to the own risk and solvency
Europe see an opportunity arising from Solvency II – an assessment. It is, of course, unrealistic to expect
opportunity to fix some of the problems that they have absolute clarity in an area where implementation is
been looking to fix for some time. A chance to become so dependent on the way an insurer wants to run its
more effective at managing capital and to get more business. However, there is real recognition of the
precise about the way it is allocated. challenges this generates, particularly in the need to
develop approaches to compliance that are sufficiently
However, insurers across Europe recognise that these flexible. And recognising that 2013 is the beginning of a
benefits will only be released if they manage to focus journey not the end.
beyond Pillar 1 and are able to fully embed the changes
in their business operating model. This requires In all the European insurance industry is getting on with
significant change. Primarily, but not exclusively, change Solvency II, it is genuinely excited by the opportunity
in a particularly challenging area, finance and actuarial. that is presented, but fearful that it should not become
Insurers understand the need to bridge the gap but overkill, requiring unnecessary change and expense and
the skills to effect this change are in short supply and that the good intentions of Solvency II may lead to more
this presents a threat to their ability to extract all the opportunity for arbitrage in an unbalanced, and under
benefits. As the deadline approaches will all the good resourced regulatory environment.
intentions be thrown aside in order to ‘just comply’?
THE EFFECTS OF SOLVENCY II APRIL 2011 2

4. Key findings
• Insurers are concerned the regulators will These include resource issues but also time pressures,
not apply the regulations equally across the especially as some of the requirements are still to be
European Union, potentially reducing the benefits finalised.
they are looking to harness by investing time, effort
and money in Solvency II compliance. These concerns • Uncertainty remains a major issue for insurers
are based on several factors including the differing and there are concerns over the degree of fluidity
resources available to the regulators across the EU that exists around some of the rules. Among
and the different regulatory systems currently in place. the areas that are causing preparations to stall are
To reduce the risk of the regulations being applied uncertainty on the final calibrations of the standard
unequally, some insurers would like to see the European formula and guidelines on the own risk and solvency
Insurance and Occupational Pensions Authority step in, assessment.
fining regulators where appropriate.
• Implementation is expected to remain 1 January
• A shortage of resources is an issue for both 2013, although Omnibus II proposals allow for
insurers and regulators. Demand for experienced transitional measures. While some insurers are well
actuarial and risk employees has caused recruitment and advanced in their preparations, there is acceptance from
retention problems for the UK insurance industry with some that, as the deadline approaches, the objective is
our research indicating that this issue may be about to shifting from maximising the opportunities Solvency II
hit other EU countries. As well as affecting the insurers, offers to complying with the requirements. This could
many respondents also expressed concerns that, as this potentially mean missed opportunities for some insurers.
shortage of resources also extends to the regulators, it
could create a series of problems. These include failure • A level playing field across the EU is seen as
to assess all the internal model applications before the a ‘nice to have’ by many respondents. However,
regime is introduced and, once it is in place, an inability while they would like to see the regulatory regime
to enforce the regulations adequately enough once. achieving this, there is also acceptance that it may not
be achieved by January 2013. Some felt there were too
• Embedding Solvency II within the organisation many regulators and market forces for it to happen
and its operating model is seen as key to while others were more optimistic and thought it would
successfully implementing and benefiting from take a few years for a level playing field to be created.
the new regime. The research found that insurers Either way, while the new regulatory regime is unable to
recognise that Solvency II affects every element of a deliver this, some insurers may find themselves able to
business and that involving employees right across the take advantage of increased opportunities for regulatory
business is essential if they are to benefit from it, but arbitrage.
many recognised there were obstacles to achieving this.
THE EFFECTS OF SOLVENCY II APRIL 2011 3

5. The deal with the regulator
Across the European Union it is evident that insurers Our research found that some of those surveyed put it
are investing considerable amounts of time, money down to cultural differences, talking about the “stricter
and effort to comply with the Solvency II regulations. approach of the beer drinkers of the north and the
Indeed our research found that many are looking to go laissez-fair attitude of the wine drinkers of the south”.
beyond the regulations to harness as much competitive
advantage as they can from the regime. As an example, Others point to the differences between the regulators
talking about their implementation plans, one executive across the EU. For instance one executive who took part
said: “When Solvency II was first announced we decided in the research said: “How you actually implement all the
to spend the money to get over the hurdle and use it to details and facets of a completely consistent regulatory
our advantage. You get out what you put in.” regime across all of Europe, with so many different
regulators across the wider EU, is a difficult task.”
But, while the insurers are clearly committed to
achieving the new requirements, many are also Another identified the equal application of the
questioning the role of the regulators in supporting the regulations as “a challenging task”, giving as the reason
new regulatory environment. The success of the new the fact that “each country is working from a different
regime and the value they will derive from the new starting point given the different regulatory systems that
regulatory environment, they feel, could all rest on how are in place”.
the regulators enforce the requirements.
Certainly the activity of the regulators is pivotal in the
‘Each country is working from a
benefits that insurers will gain from Solvency II. The different starting point given the
success of a cross border regulatory regime requires the different regulatory systems that
rules to be applied evenly in every jurisdiction if it is to
succeed in creating a level playing field and delivering
are in place’
the benefits associated with this.
Coming at Solvency II from such different starting points
Unfortunately, if the regulators fail to apply the rules will certainly make it difficult to apply the regulations
equally and fairly, many of these benefits could be equally stringently. For example, the French insurance
eroded. This sentiment was summed up by one of the market includes a large number of small mutuals,
executives who took part in the research. They said: “It often formed to provide a single line of cover to their
makes a mockery of all the time, energy and money the members. Regulating these with the same touch as their
insurers and regulators are putting in if it isn’t applied large peers will be a challenge and accommodating such
equally.” a wide variety of entities could potentially result in a
dilution of the requirements.
‘It makes a mockery of all the time, And, although EIOPA will be able to oversee the
energy and money the insurers and supervision in each of the markets, these differences
regulators are putting in if it isn’t remain a real issue for the equal application of Solvency
applied equally’ II. As an example, one executive said: “Not all the
regulators have the same resources, credibility or the
same scale of companies.”
They were far from alone in this belief. Another
participant in the research described the potential Differences aside, all the national regulators could
inability of the regulators to apply Solvency II equally also find themselves facing a common problem with
as “one of the biggest risks for the European insurance regard to resources. Our research found that many of
industry.” the executives interviewed had experienced a skills
shortage as the demand for experienced actuarial and
All sorts of reasons lie behind the belief that the risk personnel increased. Although some have found
regulators will not be able to apply the rules equally. ways to tackle this, they remain concerned about how
THE EFFECTS OF SOLVENCY II APRIL 2011 4

6. this will affect the industry as a whole, especially with said: “If a company believes it’s been treated differently
regulators also competing for the same scarce resource. by its supervisor compared with supervisors in other
countries, it must be possible to ask EIOPA to judge.”
For example, one executive said: “Supervisors need a
lot of skilled people to understand internal model.
I wouldn’t be surprised if not all companies have had
‘It must be possible to ask EIOPA
their internal models approved by January 2013. What to judge’
happens then?”
Although some executives were unsure how EIOPA
‘Supervisors need a lot of skilled should police the Solvency II landscape, several
suggestions were made. These include playing the role
people to understand internal model’ of an adjudicator where there is any deviation; setting up
an independent team to validate the way local regulators
As well as concerns about the shape of the regulators, have adopted the principles; and, most significantly, the
previous experience of the way regulators have ability to impose fines where appropriate.
responded was also cited as an indication that the rules
will not be applied equally. For instance one respondent Whether it goes as far as some would it to do is yet to be
pointed to the financial crisis in 2008 as a good example seen but reassuringly the research found that there is
of how differently local regulators can behave. more confidence that EIOPA will be able to step up to the
mark, compared with its predecessor, the Committee
There is also evidence from previous cross-border of European Insurance and Occupational Pensions
regulatory initiatives to suggest that even with a Supervisors.
common regulatory framework, successful application
is not guaranteed. For instance, when Basel II was
introduced to create an international standard that
‘It will take time, a couple of years,
banking regulators could use when creating regulations before we get this equality’
regarding capital requirements, the regulators were not
positioned powerfully enough to impose it. The events It may also be that any enforcement measures may only
of 2008 and beyond in the banking arena show just how need to be in place for the short-term. In spite of the
catastrophic an effect this can have. differences across the EU, our research found that, in
time, it was expected that the regulators would be able
While there is a reluctant acceptance that the regulations to apply the rules equally stringently. This was summed
will not be applied equally stringently across the EU, at up in one executive’s response: “I don’t think all the
least not initially, respondents do believe that EIOPA has regulators are fully attuned to the same things. It will
a role to play where there is any deviation. One executive take time, a couple of years, before we get this equality.”
Extracting the benefit
Although there is no escaping the fact that Solvency II and respond quickly to changes in the market. Just
is an obligation and the regulators will expect insurers complying won’t enable us to do this as effectively as if
to have implemented the new regime by January 2013, we invest to go beyond the requirements in some areas.”
every executive who took part in the research recognised
that the requirements could also deliver significant
opportunities and benefits.
‘A big opportunity for the sector’
Given the spend involved in implementation, identifying
As an example, one executive from the insurance where the benefits lie is important and the research
industry described the regulations as “a big opportunity found that executives from the insurers that took part
for the insurance sector”. Another said that viewing it had found plenty of reasons to make up a business case
simply as a compliance exercise, defeated the purpose. to take Solvency II beyond simple compliance.
“Achieving compliance is not sufficient,” they said. “We
want to be able to make decisions quickly, innovate At the more technical end of the spectrum, having a
THE EFFECTS OF SOLVENCY II APRIL 2011 5

7. greater understanding of the underlying risk and where Several of the executives who took part in the research
the money is allocated is regarded as a way to improve said this was an incentive to invest at this point to secure
the risk return ratio. the benefits once the regime is in place.
The research shows that this greater transparency is
seen as a major opportunity for insurers, helping them
‘This requires good internal skills
optimise how they use their capital through improved and collaboration between different
decision-making on areas such as which markets they disciplines’
choose to operate in; where they are regulated and how
they price their products. “We’re starting to look more The new reporting requirements were also seen as
into the financial implications of individual contracts, delivering future benefits. Under Solvency II, insurers
reinsurance and pricing,” said one of the executives will need to disclose significantly more information
taking part in the research. “We’ve taken a more simplistic publicly. Although some cynicism says that customers
approach to underwriting in the past but this is changing.” will not be particularly interested in the information,
insurers also accept that the quality of the information
The research found that the ability to link technical parts could affect their reputation with customers,
of the business, such as risk management and actuarial, shareholders and potential business partners.
with decision-making and strategic development parts
was also high on the Solvency II business case agenda. Certainly more comparisons will be made, either by the
Providing investment is made to bring these two existing credit rating agencies or, as envisaged by one
together, this will drive a better understanding of the of the executives taking part in the research, by a new
business and more informed business decisions. breed of analysts that will number crunch top 10s of
insurers to help consumers decide which company gets
‘Solvency II also forces you to their business.
work more multidisciplinary in the Although there is some reluctance to make all this
finance area’ information public, whether from a competition
perspective or simply because insurers do not feel it
To illustrate this, one executive summed up the benefits will serve any purpose, this move towards greater
they believed could be achieved through greater transparency is not unexpected. Already, having a
integration within the business. They said: “Companies strong risk management process has grown significantly
will gain economic insight in the key drivers of value, in importance among the credit rating agencies and
which will help in creating focus and making economic this will become even more marked under Solvency
right decisions. Solvency II also forces you to work II. Securing a good rating is important for investors,
more multidisciplinary in the finance area, bringing shareholders and customers and is often used as a
the expertise from accounting, risk management quality mark.
and actuaries together. This will lead to a better
understanding of the business and to more integrated
financial and management reporting.”
‘Insurers will try to make the
information they disclose as neutral
Respondents could also see that having this greater as possible’
integration within the business would lead to the
development of more Solvency II-friendly products. “Insurers will try to make the information they disclose
“This requires good internal skills and collaboration as neutral as possible but there will still be more
between different disciplines,” one added. information out there. Clients will be more aware of
the financial soundness of the company they’re getting
Running an internal model is also seen as a reason to into bed with and shareholders will be able to see more
take Solvency II beyond compliance. It is recognised, clearly the link between the return they expect and the
especially in the UK, that the standard formula won’t risk that is being taken to generate it,” one executive
fit any business perfectly while, by its very nature, the explained.
internal model can be designed to take into account the
specifics of the business. Further running an internal As well as leveraging more benefits by taking Solvency
model could also mean lower capital requirements and II beyond compliance, the research also found that
reduce the amount of reinsurance that is required. insurers were taking advantages of the programme
THE EFFECTS OF SOLVENCY II APRIL 2011 6

8. of change to invest in other parts of the business that into an organisation. For example, one executive said: “It
would not have secured a budget without it. This was does take time for business strategies to follow through.
particularly the case with more established organisations We set up a risk committee in the past and it took around
where investment in new IT systems was seen as an 18 months before it was working properly. You have to
opportunity, especially where legacy systems are in give employees time to feel comfortable with what they
place. Additionally, across the insurance industry, are doing.”
there are examples of companies improving their data Clearly, with an 18 month or longer lead time, putting in
capabilities through investment in data warehouses and place the strategies to embed Solvency II throughout
data transformation projects. the organisation sooner rather than later is imperative
and will greatly improve an insurer’s prospects in 2013.
One executive explained this saying: “Solvency II is a
catalyst to speed up the implementation of improvements
in risk management developments in the organisation.”
‘One of the most critical challenges
has been resources’
But, while there are clearly benefits to be gained from
engaging fully with Solvency II and taking it beyond Given the scale of some of the Solvency II implementation
pure compliance, achieving these benefits does not projects, it is not surprising that another challenge many
happen without facing challenges. insurers are facing relates to resources. One executive
said: “One of the most critical challenges has been
To successfully harness many of the benefits identified, resources. The real difficulty is the newness of the
it is essential to embed Solvency II and the risk regulations: they take the actuarial field beyond where
management principles it is based upon throughout the it was previously. Then, once an employee learns the
organisation. This will ensure that the approach is used new skills, there is always the risk you’ll lose them to a
to shape everything from underwriting and actuarial consultancy paying more money.”
modelling through to product development and pricing.
This problem with recruiting and retaining key employees
‘Bridging the gap is needed has particularly been the case in the UK, where salaries
have increased dramatically to reflect the shortage of
between the technical parts and skilled staff. All UK respondents singled this out as an
the technically skilled people and issue, with many commenting that they were finding
the rest of the business’ it difficult to recruit staff with suitable experience.
Further, the problem is exacerbated because, as well
as competing with other insurers for personnel, the
But this is regarded as a considerable challenge and one regulator is also increasing its staffing levels to deal with
that was recognised by several respondents who took the regulation.
part in the research. As an example, one executive said:
“Bridging the gap is needed between the technical parts And, while there was less evidence of this causing
and the technically skilled people and the rest of the problems for other countries, one executive said they
business. If you can’t bridge this gap, you won’t succeed believed Germany would probably be hit by the talent
in embedding Solvency II in day-to-day business” crunch next.
Being able to translate the requirements from technical At the same time now one country has experienced this
rules into practices that will be relevant to each member problem it may be less of an issue for others in the future.
of staff’s day-to-day responsibilities is essential. Being Not only will there be more trained, and experienced,
successful here will not only ensure an insurer is fully personnel but the research found that some UK insurers
compliant but will also enable them to gain as many had found ways to avoid this becoming a major issue.
benefits as possible under the new regime. Some have looked outside of the industry, to sectors
such as pharamaceuticals, to recruit suitable staff.
The research found that projects are already Others have recruited from outside the UK, bringing
underway at many insurers to address this. There was personnel with the necessary skills in from the EU and
acknowledgement that training and communication even the US.
programmes can help to increase awareness and
encourage employee buy-in but there is also acceptance The research also found that time is a pressing issue
that the requirements will take time to be fully embedded for many of the insurers, especially as they await final
THE EFFECTS OF SOLVENCY II APRIL 2011 7

9. details on some elements of the requirements. This is Therefore, those insurers who are not prepared and
likely to have an effect on the opportunities they look have to switch the approach to implementing Solvency
to take from the regime. For example, one executive II could miss opportunities, at least in the new regime’s
claimed: “The closer you get, the more people forget first few years.
they’re meant to be principles based and it becomes a
compliance exercise.”
PREPARATIONS ACROSS THE EUROPEAN UNION
In addition to gauging which benefits and Often, where comparisons were drawn between the regulators in these countries are competing for
opportunities the insurers were looking to gain countries’ states of readiness, they tended to be resources, which is something we’ve seen a lot from
as a result of Solvency II; how they intended to on a North versus South basis, with the Northern the Financial Services Authority.”
harness these; and the challenges they are facing, countries such as Germany, the Netherlands and the
our research also examined how far advanced the UK seen as more advanced in their preparations. Another key indicator that was referenced by
insurers believed they were in their implementation However, one executive who took part pointed several respondents to how insurers across the
projects as well as how they felt their European out the UK had a slight advantage as Solvency II is EU have approached Solvency II was the internal
neighbours were faring. more closely aligned to the way its regulation works model. Many people have built business cases
than anywhere else in the EU. around investing in an internal model, seeing it as a
This found that although Solvency II is firmly on means to more accurately reflect risk and, thereby,
the agenda across the insurance industry, there is They added: “Germany isn’t far behind the reduce capital requirements.
also evidence of varying states of readiness across UK. It has a stable economy and the insurance
the EU. One executive said: “There are some industry is well capitalised and already has a good However, as several respondents pointed out, with
markets where the regulators and participants understanding of risk management. I’ve heard much the number of applications for the UK roughly the
are well advanced, such as the UK, but behind less noise about Solvency II from other countries same as those for the rest of the EU, it appears not
them are two or three tiers when it comes to though, with very little coming out of countries such every insurer believes there is sufficient merit to
preparations.” as Spain and Italy. On top of this, I’m not aware make the investment.
The problem of uncertainty
Although it is full steam ahead for Solvency II Solvency Assessment, which could also potentially delay
implementation, our research found a significant amount insurers’ preparations for January 2013.
of uncertainty still pervades the insurance industry.
Among the challenges that insurers are still grappling This uncertainty has the potential to cause a lot of
with are practical issues such as recruitment and IT damage. One executive explained: “One of the biggest
and infrastructure requirements. However, many of the risks is regulatory uncertainty.”
issues come down to one thing – regulatory uncertainty.
‘One of the biggest risks is To support this, the research found that many of the
executives interviewed regarded a last minute change in
regulatory uncertainty’ the rules, or the final rules being agreed too late, as the
number one risk to their implementation plans. Clearly,
Although Solvency II is principle-based so insurers this would have implications for both insurers and
will always be able to interpret the requirements in line regulators, both of which would have to adapt quickly if
with their own business models, some of the details still compliance were to be achieved in January 2013.
need to be finalised. A key example of this is the final
calibration principles for the standard formula, which are
expected following the fifth Quantitative Impact Study.
Some say the goalposts are moving;
Without these, insurers are unable to fully appreciate others say they’re invisible
what is required or whether an internal model would be
more suitable. Another example of an area where more And the possibility of this happening is perceived as very
detail is awaited is the guidelines on the own Risk and real. For example, one executive claimed: “Some say the
THE EFFECTS OF SOLVENCY II APRIL 2011 8

10. goalposts are moving; others say they’re invisible.” And, for more than 10 years that this would be introduced.”
without regulatory certainty, not only will preparations
falter but, come January 2013, the possibility of having A further delay in implementation was also seen as
a level playing field, itself one of Solvency II’s key potentially harmful to the industry’s reputation. One
objectives, will be greatly reduced. executive stated: “European Union politicians have had
a wake-up call regarding instabilities in the financial
Insurers also face some more practical challenges, as a markets. They should feel obliged to ensure the quality
result of the uncertainty around the regulations. With and stability of the insurance sector.”
data so central to the requirements, both in terms of
the amount and the frequency that it is required but However, transitional measures were also regarded
also in terms of its accuracy, having efficient IT and data as a possibility, with the Omnibus II revisions, which
management infrastructure is essential. For an insurer were announced in January, potentially giving the
tussling with legacy systems or outmoded technology, industry some significant wriggle room. These give the
this will be a significant challenge. European Commission the power to delay elements of
the requirements, including those relating to capital
This is further complicated because the rules that will adequacy, by up to 10 years.
affect the IT standards for delivering information to the
regulators are yet to be finalised. This was summed up There are mixed views regarding the need for
by one executive: “The major challenge is to change transitional measures. On one side, some respondents
and improve the IT environment in accordance with the felt transitional measures were unnecessary, and would
Solvency II requirements where these requirements are potentially create more regulatory uncertainty.
also changing and no final and fixed.”
Time is another issue. Although some respondents are
‘Cut some slack in this area and
confident they will have completed their implementation phase it in over five years’
projects ahead of the deadline, others acknowledge it
will be a scramble to achieve compliance. To support this Others felt that transitional measures would be necessary,
there has been a marked shift in sentiment among some due to the different states of preparedness across the
insurers. As an example, one executive explained: “The EU. For example, one executive felt there would be
closer you get, the more people forget they’re meant advantages to phasing in some of the requirements.
to be principle-based and it becomes a compliance “There’s a pressing need for provisional arrangements
exercise.” to phase in a number of requirements, especially when
it comes to reporting,” they said. “The industry does
Such a shift in focus will inevitably mean a downgrading need to report from the beginning so the regulators can
in expectations, with some insurers having to postpone better understand the implications of Solvency II but
or cancel entirely some of their plans to take further the amount of information that’s required is huge. Cut
advantage of the new regime. some slack in this area and phase it in over five years.”
‘The more it’s put off the more pain But, given the challenges and the different states of
preparations across the market, it is unlikely that
there’ll be’ everyone in the market will be 100% compliant come
January 2013. Because of this, a halfway house position
But although there is still such a large amount of may be inevitable.
uncertainty surrounding Solvency II, with this further
exacerbated by the potential shortage of resources at
insurers and, perhaps more significantly, the regulators,
‘Most insurance companies and the
the research found unanimous support for sticking to regulators themselves will not be
the 1 January, implementation deadline. fully ready to start working under
Delaying, many felt, would only add to the pain and effort
the requirements by January 2013’
required and would disadvantage those that had already
put in the necessary work. One executive believed: “It’s “I do not believe the implementation of Solvency II will
realistic. The more it’s put off the more pain there’ll be.” be postponed but I also believe that most insurance
Another said: “It’s not an overnight thing. We’ve known companies and the regulators themselves will not be
THE EFFECTS OF SOLVENCY II APRIL 2011 9

11. fully ready to start working under the requirements by they would have to fall back on the standard model and
January 2013,” one executive said. lose the competitive advantage they may have secured
through their internal model.
“The first years will be used to fine tune the new
regulatory requirements from the regulators’ perspective But while delays, whether intentional or otherwise,
and insurance companies will need additional years to occur, everyone recognised the importance of
fully adopt Solvency II and comply with all the internal implementing Solvency II.
model requirements.”
One executive summed up the industry sentiment
Having this extra time will allow the new regulatory perfectly: “Solvency II will be important in improving
requirements to be fully bedded in. As an example, in the trust in financial markets. The financial crisis has shown
UK, a large number of companies are seeking internal that the current framework is not suitable for handling
model approval and there is a perceived risk that the stress events. It is in the interest of the insurance
regulator does not have the resources necessary to industry that trust is restored and a new Solvency
assess all the applications in time. This could potentially II framework that is risk based, targeting capital
cause major problems for those insurers affected, requirements in accordance with the risk profile, will
raising questions about whether it would be fair to use help in restoring this trust.”
the internal model, albeit without approval, or whether
Conclusion
With less than two years to go before the introduction of The existence of so many different regulators and market
Solvency II, the insurance industry across the European forces was seen as the main stumbling block for this,
Union is engaged with the preparations and looking with one executive saying that regulatory requirements
ahead to the opportunities the new regulatory regime were only one of the many hurdles to overcome to create
will create. a European insurance market.
One of these opportunities, and indeed one of the In spite of these doubts, most agreed that Solvency II
objectives of Solvency II, is the creation of a level playing would eventually help to create a level playing field; it
Methodology
field through this equalising the capital requirements was simply a matter of time for the rules to bed down To assess how the new
across all EU insurance markets. with insurers and the regulators. One executive summed Solvency II regime is perceived
up the sentiment by saying: “The level playing field was by insurers across Europe,
Certainly, this is an element of the new regime that one of the original purposes of Solvency II. It will achieve Post Europe in association
many of the executives who took part in our research this but I do feel this will take some years to achieve.” with Atos Origin, conducted
welcomed. This, they said, would improve competition research among chief risk
within the European insurance market. For example, Just how long it takes for the market to reach this officers and chief financial
one executive said: “We will not undervalue the impact of position is unknown. However, it is fair to say that the officers based throughout
improving a European level playing field. By restricting manner in which European Insurance Occupational Europe. Interviews were
the possibilities for national interpretations, Solvency II Pensions Authority decides to enforce the regulations conducted during January
will support steadily increasing economic cross border will be critical to the timescale. The research found there and February 2011 and
activities of insurers and encourage a free European was support for EIOPA taking an active role in ensuring covered areas including their
market.” the regulators apply the rules equally across the EU. preparations for the new
Some executives talked of independent adjudication regime; what they viewed
Others were more ambivalent about it, especially smaller teams; others went as far as calling for a system of fines. as the major challenges and
and more niche players, which had already carved opportunities; how they
out their markets and expected little change, at least But, even though the European insurance market is expected to operate under the
externally, as a result of the new requirements. unlikely to be in the state proposed under Solvency II new regime and whether they
come January 2013, with regulators as well as insurers believed Solvency II would
But, whatever their view on the creation of a level playing struggling to meet all the requirements in time, it is seen succeed in creating a level
field, most accepted that it would not be achieved easily. as unlikely that the introduction of the new regime will playing field.
THE EFFECTS OF SOLVENCY II APRIL 2011 10

12. be delayed. Neither do the insurers that took part in our using the standard formula but when it found this Participants
research want this to happen and there is acceptance resulted in a massive capital charge, had decided to
that there will be a couple of years of fine tuning as adopt an internal model instead. Competing against The following insurance
everyone in the industry gets accustomed to the new an insurer with a standard formula will allow it to use companies took part in the
rules. its reduced capital requirement to reduce pricing and telephone interviews.
become more competitive.
This could create an interesting transition period for Achmea
the insurance market. While some will clearly still be So, while Solvency II sets out to create a level playing Aegon NL
focusing on compliance; others will have achieved field, as a result of differences between the EU’s Amlin
this and, although there may be some soreness that regulators as well as the skills shortage in the market, Assurant Solutions
they’ve invested time, money and effort to achieve the it may inadvertently lead to more opportunities for Barbican Insurance
regulatory goals, they may be able to use this to their arbitrage, at least while the regulations are bedded into Markel International
advantage. the market. How long this period lasts is unknown, but, Munich Re
for many of the insurers taking part in our research, Wesleyan Assurance Society
As an example, one insurer recognised it might have EIOPA, and the stance it takes when the requirements Zurich
the competitive edge in markets where the majority of are applied less stringently, will have a significant
insurers had kept the standard model. It had considered bearing on this.
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financialservices@atosorigin.com
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THE EFFECTS OF SOLVENCY II APRIL 2011 11