31 August 2015

Financial Times: Crunch time for insurers on capital rules

Investors would be forgiven for assuming that only minor details need to be finalised before the new regime takes effect in four months. After all, regulators have spent more than a decade planning it. [...]

The warnings have investors in other European insurance companies [apart from Delta Lloyd and Aegon, whose shares plunged after recognising that their capital surplus would be lower than expected] wondering whether they too are in for nasty surprises before the reforms, known as Solvency II, kick in at the start of January. [...]

Executives at several big insurers have said that the new rules, designed in the wake of the financial crisis to ensure companies have strong financial buffers so they can meet claims, should be manageable. Yet behind the scenes, the industry is on tenterhooks. “They’re all absolutely petrified,” says a Solvency II consultant at a big four firm.

Brussels policymakers agreed the basis of the regulations months ago. But they set a tight implementation timetable. National supervisors still need to specify the capital requirements for each big insurer by taking into account the particular risks they run.

Regulators need to approve each company’s “internal model”, which amounts to sifting through gigabytes of arcane detail about their risk exposures. Without being able to use the bespoke version, companies must fall back on the cruder “standard formula” laid down by regulators, which may oblige them to hold more capital.

Watchdogs also need to grant insurers permission to use other crucial mechanisms that give them further relief from the most onerous regulatory demands. [...]

Despite the uncertainty surrounding the outcome of Solvency II, analysts do not expect many insurers to have to raise additional capital solely because of the new regime. Even so, not all are convinced the risks are confined to the Netherlands. “Be prepared for volatility,” warns Niccolò Dalla Palma at Exane BNP Paribas of the next few weeks.

Share prices across the sector are vulnerable, says Gordon Aitken, analyst at RBC Capital Markets. “We see risk skewed to the downside from Solvency II,” he says. “Even in the best-case scenario of a benign result, we do not expect share prices to react positively.” [...]

The PRA, which is scrutinising the models of about 20 insurers, does not plan to say which have been approved until December — shortly before the regime begins to take effect. [...]

© Financial Times