Solvency II: You want more capital, we’ll want more rate, insurers say

This WSJ opinion piece by Bernard Spitz (chairman, French Federation of Insurance Companies) lays out the additional capital requirements laid onto Solvency II of late, then notes:

The costs for Solvency II’s proposed, excessive prudence will have to be paid by consumers and the economy as a whole. Insurance premiums will rise, while coverage and benefits for policyholders may have to be reduced. The cost of life and pension insurance products in particular could rise by up to 30%, since higher capital requirements and higher funding costs would be compounded by the reduced investment income derived from choosing safer, but low-return vehicles. Consumers who rely on this income to fund their retirement may be forced to lower their standard of living. Given the lower profit margins, some insurers might be tempted to exit whole areas, such as automotive or medical liability insurance, there again leading to higher rates from the remaining actors.

Projections show that non-life product prices would increase by 5% to 20% for more capital-intensive products, such as those with greater exposure to natural catastrophe risks (for instance, homeowners’ insurance in regions with a high risk of windstorms or floods) or those with a long claim tail (general liability, but also products such as third-party automotive liability).

Obvious to most actuaries. But surprisingly, a lot of well-informed people do not recognize that insurance companies essentially rent access to their unencumbered capital. And that’s where supply/demand takes place. If you raise required capital standards, unencumbered capital falls. So unencumbered capital becomes scarce and the price of insurance rises.

Also says that 2008 financial meltdown was the “best, life-sized ‘stress test’ to which the European industry could be subjected, and that it passed with flying colors.” I’d dispute that. 2008 was an excellent test of resilience to market risk. There are significant operational tests that insurers face – pandemic, cataclysmic cat, etc. – that threaten companies, too. Being resilient in bearing market risk doesn’t mean a company can survive two hurricanes hitting Long Island.

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