01 December 2011

Implementing Solvency II will cost UK insurers £2 billion

In a 110-page consultation document and impact assessment published last week, the Treasury has set out how it intends to adopt the mandatory Directive, which will introduce EU-wide rules for insurance and reinsurance companies.

Martin Shaw, chief executive of the Association of Financial Mutuals, said the document was finally starting to shed some light on the true costs involved, which he said the government had previously had a “degree of reticence” in admitting. Mr Shaw warned that some of these costs would be disproportionately large for smaller organisations, such as mutuals, because so many of the costs are fixed.

He said: “Smaller organisations have to do more work to meet the requirements than larger ones. Many will need to outsource the work, which means higher costs, while bigger institutions can do this in-house.”

The main objectives of Solvency II are to increase competition, drive prices down, improve standards, protect consumers and strengthen supervision through minimum capital requirements. The Directive will apply to all EU insurances and reinsurance firms, regardless of size. Because it is a maximum harmonisation Directive, Solvency II is mandatory and there is no scope for the UK government to pick and choose which parts of the legislation to implement or to pursue alternative options.

Adopting the regulation will require changes to the Financial Services Act, which is why the Treasury has published the consultation document asking the insurance industry for feedback on the way it plans to implement the framework. The consultation will run for 12 weeks and will close for responses on 15 February next year.

Mr Shaw said the consultation document and impact assessment showed the UK insurance industry was well placed to adopt Solvency II, but that a “significant minority”, particularly life insurers, have a shortfall between the minimum capital requirements they would need under the new regime and their existing level of capital. He said: “It is a problem at a time when going out to markets to get new capital is not easy. It does not seem a problem for mutuals because they tend to be well capitalised, but it does explain why a lot of big insurers have been less interested in buying market share in the life industry in the past few years and more focused on building up their capital.”

Tony Catt, compliance officer for Essex-based True Potential, said: “Although anything that makes a market safer to invest in is good - and customer protection must be the top priority - chances are that insurance companies will eventually pass the costs on to consumers".

Press release

© Financial Times