CEIOPs S2” opens in a nation
near you in 2012 and leaves U.S. carriers in their
international competitors’ dust. Hmm. Political motives
here? Ya think?
Coming soon to a theater near you: “CEIOPs S2”!
Sound scary? Some in the insurance industry think so, and it
has U.S. regulators afraid of what’s behind the door.
Actually, CEIOPS S2 is short for the Committee of European
Insurance and Occupational Pensions Supervisors and its spawn,
the Solvency II project.
After years of study, Solvency II was officially adopted by
the European Union in 2007. Its aim: to create a comprehensive
and far-reaching reform package that would remove obstacles to
an efficiently functioning insurance and reinsurance market
while improving supervision and oversight of risk. In
announcing the project, the EU said it would close the huge gap
between how insurers manage risk and how they are regulated,
and would serve as a model for worldwide supervision of the
Solvency II introduces risk-based solvency requirements
across all EU members. The total balance sheet approach takes
into consideration both asset-side risks and liability-side
risks. It extends the definition of risk to include market
risk, credit risk and operational risk as, well as insurance
risk. Insurers will be required to hold capital against all of
On the upside, the EU says there are competitive advantages
to the insurer. The better a company manages its risks and the
more diversified it is, the less capital it may have to put
The financial crisis, however, was a game changer.
It’s unlikely that insurers will see their capital
lowered. Last year, a CEIOPS proposal called for a 70% increase
in capital levels over what was recommended in an earlier
study. Although it’s expected that the next impact study
will recommend capital requirements lower than that, the levels
are likely to be much higher than initially assumed.
Clara Hughes of Fitch Ratings says a likely outcome of
higher capital levels will be consolidation in the European
market among smaller insurers struggling with the cost of
compliance and raising the capital needed to meet the higher
solvency requirements. Also, higher capital levels could result
in insurers hedging assets and liability
risks—potentially buying more reinsurance—and
changing their business mix in favor of less capital-intensive
lines of business.
Risk managers are concerned that higher capital requirements
would significantly raise the cost of insurance.
FERMA—the Federation of European Risk Management
Association—also worries that it will reduce the
availability of insurance, particularly for volatile lines.
Despite the concerns and continuing “study” of
the impact, Solvency II is scheduled to go viral on December
31, 2012. All European insurers and reinsurers will be subject
to the new rules.
But Solvency II’s reach goes far beyond the EU, which
raises competitive worries outside the EU community. The
requirements also apply to any U.S. or other foreign insurer
with European subsidiaries—meaning that U.S. parents with
subsidiaries in Europe most likely will have to put up more
capital, implement new internal controls, report on internal
risk issues and carry out risk and solvency assessments at a
Solvency II also includes an “equivalency”
provision, which allows the European Commission to anoint other
supervisory authorities outside the EU as having regulatory
schemes that meet the EU standards. Unfortunately, the U.S. is
not among the first group of countries to be assessed for
equivalency, according to CEIOPS. Bermuda and Switzerland
Excuse us, but the U.S. is the largest insurance market in
the world. Not to include it in the first round of assessments
is a serious slight and puts U.S. insurers at a competitive
disadvantage. CEIOPS’s rationale is that the U.S.’s
state-based system of regulation hampers assessment. Even
though the NAIC develops model acts for the states to adopt,
CEIOPS still has to deal with more than 50 regulators. It says
it simply doesn’t have the resources to do the
No one understands better than the U.S. insurance industry
the limitations of our regulatory scheme. The Council, along
with many of our insurer brethren, has fought long and hard for
uniformity in the laws and regulations governing us. Complying
with multi-state requirements is costly and inefficient.