Solvency II: Bummer for small life companies

I listened to A.M. Best’s Vasilis Katsipis, general manager – analytics, on Solvency II. Now you don’t have to. (If you want to, the link is here – it’s the first five minutes.)

Sez Katsipis:

  • It will be more difficult for small life insurers to operate and compete under S-II.
    1. The standard S-II model will require more capital. Big companies will have their own model which will reduce the need for capital, but smaller companies won’t have the money to fund their own model, so they will have to hold more capital, all else being equal.
    2. S-II prizes diversification, and small companies are less diversified than big ones.
    3. Compliance is a big job under S-II, and it’s harder for smaller companies to muster the resources (basically an economies of scale problem).
  • Small companies may become takeover targets. S-II isn’t the reason – blame relatively weak recoveries from the 2008 economic meltdown – but Solvency II will be “the straw that broke the camel’s back. But the main reasons aren’t Solvency II. The main reason . . . will be the economic position which has made these companies’ capitalization weaken and the products that they offer either very expensive or nobody wants to buy them.”
  • What should small companies do?
    1. De-risk – A lot hold liabilities with significant embedded guarantees. They will need to hedge against scenarios that could lead to declines in assets values.
    2. Diversify – easier said than done, because small insurers typically occupy a niche. It’s hard to break out of a niche, though – the company may not have the skills to break out, and it’s what you are known for in the marketplace.
    3. Prepare for Solvency II, particularly the second pillar (governance and risk management). Make sure processes are up to speed.

His final aside: “If you don’t have an internal capital model now, you will not have one” in 2012, when Solvency II goes live.

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