Solvency II – Good but not perfectly formed

At last, we have political approval within the intended timescale to a new risk-based regulatory framework for insurance regulation in the EU – Solvency II. After much negotiation between the European Parliament, Commission & Council a compromise was reached which broadly speaking is positive and at least gives certainty. However, it is not, unfortunately, optimal because group support, an important element advocated by the industry, has been omitted for what look like political reasons. The key to group support is that it would have allowed large companies to achieve better capital efficiency; consequently some may now be less engaged in the process. This opportunity has now been missed as capital requirements will be set at a local level and not by a lead supervisor. Insurance and reinsurance is a cross-border industry but will not be fully regulated accordingly. There are however many wins in this agreement not least a new framework which underpins the industry for years to come and which may, at least in substantial part, become a global standard. Many believe that the agreement on Solvency II has come at an ideal time and demonstrates a belief that economic, risk-based, transparent approaches are right for the current climate. Regulated firms will have much to do now to ensure they are ready for Solvency II D-Day, sometime in 2012 (or perhaps 2013).