S-II will cost insurers, on average, two-thirds of their surplus capital, a Morgan Stanley/Oliver Wyman study concludes (pdf press release), with reinsurers and non-life (P&C) insurers hit hardest.
The European insurance capital standards have been in the works for several years and are due to be implemented at year-end 2012.
From the Financial Times:
While Brussels has since watered down the proposals, they still look significantly more painful for the industry than was expected before the crisis. Furthermore, the study predicts that the cost of capital for the industry in general is likely to increase as greater transparency in the new standards will expose the economic volatility of insurers’ financial positions.
Higher cost of capital means higher rates, which would make sense if S-II is making capital more scarce. Remember insurers and reinsurers rent access to their capital in case disaster befalls a customer.
It suggests the rules will lead to a wave of mergers and acquisitions as the industry is forced to face up to the need for a fundamental reform of the kinds of products it sells and how and where it sells them.
FT points to winners like Munich Re, Allianz, Aviva, Axa and Generali, whose diversified business gives them a break. The mergers will bring competitors to equal footing. It sounds like P&C-only companies will have to partner with a life company, but that’s just me trying to read between the lines.
Well-capitalized reinsurers will also benefit as smaller mutuals will need to buy reinsurance. FT continues:
“For non-life companies, the focus will be on increasing diversification and making sure they get internal model approval [which would reduce their capital requirements],” said Jon Hocking, analyst at Morgan Stanley. “Investors are going to be very surprised by how much non-life insurers’ capital will decline under Solvency II.”
Internal models, of course, are where the actuaries come in. S-II remains a boon for European actuaries.