Looking to the future: how Solvency II is impacting the insurance asset management industry

Eberhard Müller, Former Chief Risk Officer and Managing Director at Hannover Re examines how solvency II regulations could impact insurance investment over the next ten years

Insurance Investor Editorposted on Thursday, August 08, 2019

This article is taken from the research report Insurance Asset Management, Europe 2017. To download the full report click here.

Insurance Investor: The Solvency II rules have divided opinion in the industry. To its opponents, it is an overly complex piece of regulation that will add layers of administrative process and raise prices for its customers. Is there any truth to this point of view?

Eberhard Müller: I do not see that there are differing opinions in the industry regarding the complexity of the current Solvency II rules.

Especially when it comes to the Pillar III reporting requirements, nearly everybody agrees that this will create expensive ‘data cemeteries’ and it is questioned whether regulators will have the resources to get through the data mountains in a meaningful manner.

Additionally, other parts of Solvency II can hardly be explained to regular members of the public. If you have a look at the so-called Standard Formula, you might not really get the impression of an easy to apply standard.

The opposite is true: looking, for example, at the module for manmade catastrophes, it appears that some experts might have tried to converts parts of internal models into a standard formula!

"Any expenses incurred by overly complex or onerous requirements will finally be reflected in prices for insurance"

It is quite doubtful whether these degrees of detail really help to improve the policyholder protection through risk-based capital requirements, especially when considering that for certain risk categories (reputational risk and strategic risk for example) there are no capital requirements at all.

This does not mean that there should be another artificial formula for these risk categories. The opposite is in fact true: it means that the overall level of uncertainty should be recognised when coming to more detailed requirements within individual risk categories. This would be a highly-welcomed application of the ‘principle of proportionality’.

Any expenses incurred by overly complex / too onerous requirements will finally be reflected in prices for insurance.

II: How will it change the way insurers operate in the long term? Will it for instance change business models?

Eberhard: After a first phase of really caring about risk management, governance structures, risk and capital relations and risk culture, there might be a second phase (some undertakings may already have been reached) where the existing structures are regarded to be mature and the efforts are more on the efficiency side, i.e. attempting to pass regulatory hurdles with the lowest possible use of resources.

The unfortunate development will be a lot of cheap box ticking exercises to fulfil formal requirements without anybody really caring about the content.

An example of this kind of development might be the U.S. more than one decade after the “Sarbanes –Oxley-Act” of 2002.

II: Where will the main impacts be? It’s been said that Solvency II will have fewer implications for non-life property and casualty business and that the main impact will be on life insurance and the customer?

Eberhard: Major impacts could have been observed for both parts of the market, life and non-life, already before the formal implementation of Solvency II throughout the more than 12 years of discussion after the official launch of CEIOPS in 2003.

This is especially true for larger market participants and coincides with simultaneous developments by rating agencies (like S&P’s ERM standards from 2005 onwards). Predominantly effected were Pillar I (capital requirements) and Pillar II (governance).

"If the low interest environment lasts there will be an increasing discussion about the ultimate forward rate"

For Pillar III (reporting) there will still be major experiences in the years to come, especially with respect to “market valuation” and the application of “volatility adjustment” procedures. And there will be higher impacts within the life industry than for non-life or reinsurance.

If the low interest environment lasts there will be an increasing discussion about the ultimate forward rate or the sustainability of certain approaches at all.

This article is taken from the research report Insurance Asset Management, Europe 2017. To download the full report click here.