Have you analysed the business implications of Solvency II?

In a recently published report by Morgan Stanley and Oliver Wyman, the impact on Solvency II on an insurance organisation becomes increasingly clear.

 

The report uses their proprietary QIS5 model to analyse the impact of Solvency II on four fictitious companies – a life company, a non-life, a composite and a reinsurer. The key findings were:

 

The solvency ratios for the non-life oriented insurers show sharp declines under QIS 5;
Reinsurers are likely to see a major decline in reported solvency ratio, but demand for reinsurance should increase;

• For life, the major impact is for participating (with-profit) policies;
• The majority of the industry's capital requirement would come from a combination of market risk and participating contracts;
• Diversification benefits will also be a key driver of the Solvency II capital requirements; and
• European insurers may become competitively challenged in markets with "non-Solvency II equivalent" regimes.

 

Being one of the largest regulatory programme till date, it is important to view Solvency II as a major catalyst for changing the traditional business models on insurance companies. An industry beset by declining investment returns, inefficient processes and legacy IT systems, need major overall in the way they do business in the future. The report rightly points out that the pace of strategic change will dramatically improve in the Solvency II world with the transparency brought about by the regulation. However at the same time, there exists a risk of the European insurers’ competitive advantage threatened by their ‘non-Solvency II’ competitors across the Atlantic!