Big guns aim at Solvency II

Well, not quite as dire as my headline, but when four leading industry bodies – the CEO Forum, the CRO Forum, the Pan European Insurance Forum and the European insurance and reinsurance federation – decide to tag-team Solvency II . .

Obviously this action and others like them won’t be enough to derail the initiative, nor are they intended to be. But the stories have been clear: European insurance executives like Solvency II in general but worry that it requires too much capital be held – in this case for variable annuities.

The result, the executives contend, will be higher insurance prices and more cyclicality in the market. (A key reason for Solvency II, of course, is to dampen cyclicality.)

But specifics in the general press have been vague. A sample:

The industry has concerns in a number of areas, including how liabilities for long-term savings or guaranteed products are calculated and political influence on what constitutes stressed conditions for such liabilities. It is also concerned about an overly conservative level of prudence in the capital required for catastrophe insurance and about restrictions on its ability to count the value of future profits towards capital today.

The above Financial Times passage is talking first about contract boundaries, which – generally speaking – concern when the terms of contracts like annuities get re-set. The more frequently contracts re-set, the less capital they should require. The re-setting adjusts the amount of risk the contract bears.

The line about political influence refers to European regulators reserving the right to call when a situation is considered stressed. The executives worry that that makes a political football out of an economic crisis.

The last sentence, that too much capital is required for catastrophe insurance, is a longstanding p/c observation.

These concerns aren’t new, which is part of the problem. The executives feel they haven’t been listened to. Their entire letter is here. And a letter to the editor of Financial Times – another sign in itself that the executives are getting impatient – is here.

 

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