Willkommen zu Solvabilität Zwei, Herr Schmidt

We thought that we’d allow our readers to recover from their year-end activities and get over the shock of the fact that Solvency II has actually happened after many draft iterations, much politicking and seemingly endless horse-trading. Even in this supposedly digital age, forests will have been felled to provide the paper required to print all the text of the Directive and its implementing Regulations- just try reading all of it on a screen! We aim to spare your eyesight from further strain.

So, what now? The earth did not shake, nor buildings tumble.

However, let there be no mistake that actually having to implement and abide by Solvency II, does represent a major change, not just for those subject to and directly affected by it within the EU, but also globally because of the fact that it creates a benchmark for other regulatory regimes across the globe, and requires any (re)insurance executive to pay attention to its implications.

Firstly, kudos to the BMA for achieving full equivalency. This will serve the important Bermuda market well in continuing to develop and expand its reach, with the Awbury Group one of the beneficiaries.

Secondly, it will make it much easier for anyone wishing to undertake a “contrast and compare” exercise on the financial capacity and capital strength of any EU-based (re)insurer somewhat easier (we would never say easy!), because of the need for companies to be seen to be more transparent in reporting, and greater consistency in how such information is presented. Yet care will need to be taken in distinguishing between those companies that will have to use the Standard Model, and those permitted by their national regulator to use an Internal Model (whether full or partial.)

Thirdly, as Solvency II tends to reward diversity and scale, there is likely to be some pressure on more specialized and smaller insurers to seek a larger partner, while the larger ones will seek to continue to increase in diversity and scale.

Fourthly, it will place more emphasis on the composition and quality, as well the quantum of capital, with companies benefitting from being perceived as having a capital base that it more resilient and less volatile.

Nevertheless, fifthly, and somewhat paradoxically, the fact that Solvency II requires an effective “marking-to-market” of both sides of the balance sheet, assets and liabilities, means that the Solvency Capital Ratio (SCR), which will become a key metric used in comparing companies’ financial strength, is likely to become more volatile, with the weightings enforced for varying exposures potentially having a more material impact and causing “capital strain”.

Already, there is talk that certain market sub-sectors, such as German life companies, and life companies more broadly, will suffer a greater impact from Solvency II’s implementation than general or “P&C” companies . Yet, all companies are going to have to look much more closely at the capital efficiency of their balance sheets; and how, in a still yield-constrained and volatile world, they can achieve better risk-adjusted returns, without unduly straining their SCRs.

At Awbury, having studied Solvency II, and with the benefit of our long experience in the insurance, banking and capital markets sectors, we have developed a number of strategies and techniques for helping our clients in the (re)insurance business manage their capital more effectively, while allowing them greater flexibility in, say, asset allocation. As such, we welcome the opportunity for dialogue on how we can be of service in enabling you to meet your risk/return and SCR goals; so, give us a call.

The Awbury Team

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