Insights into the future of Solvency II

8 Jul 2016

After years of seemingly endless negotiations, Solvency II finally came into force on January 1, 2016. With its implementation, the European insurance industry has completed its move to risk-based supervision, thought to be more in keeping with accurately monitoring and regulating the key risks faced by insurers, particularly following the financial crisis.

A new report from Timetric's Insurance Intelligence Center (IIC) looks at how Solvency II will play a key role in the strategic decisions of insurers at board level and the influence upon their investment strategies, as well as Brexit's impact on the future of Solvency II.

Solvency II will significantly affect business strategies

According to the report, there are a number factors that are pushing insurers, both small and large, towards changing their business strategies, most notably engaging in M&A activity. The more strenuous reporting requirements, diversification benefits and advantages of being able to use internal models that come with Solvency II all favour larger insurers. Smaller insurers, on the other hand, have fewer resources available. Furthermore, as they tend to be less diversified, each unit of business they write requires more capital than it would for insurers that underwrite a number of different lines.

The other significant strategic decision is a shift to asset management. The continuing period of ultra-low interest rates is making the business of life insurers very difficult and less profitable. As a result, they are beginning to branch into third party asset management. Reminiscent of the move of the large investment banks such as UBS and Credit Suisse, the likes of Aegon, Allianz and Aviva have made moves to strengthen their asset management operations.

Brexit may have far reaching implications for Solvency II

With the UK's exit from the EU and the departure of Lord Hill, the UK has lost the European Commission's financial services brief and there has been a move to sideline the UK in discussions pertaining to the EU. Therefore, the PRA's influence in discussion over changes to be made to Solvency II and the path it should take is likely to be diminished over the next two years. When one considers that the PRA has been seen as 'gold-plating' Solvency II regulations in previous years, it may be the case that the framework develops in a materially different way than it would have done in the absence of Brexit.

All information is based on the Timetric insight report: 'Solvency II - Beyond Implementation'.

Source: Company Press Release