09 July 2013

Risk.net: New Dutch capital requirement 'conceptually flawed', warn insurers

Dutch insurers are railing against a proposal to introduce an additional solvency rule to bring life insurers' solvency capital requirements more in line with the long-delayed risk-based Solvency II regime.

Under the Dutch central bank's (DNB) plan, Solvency I capital requirements will remain in force, but insurers' capital position will also be assessed against a new risk-based supplementary capital buffer. Firms considered in danger of breaching the new capital standard will require supervisory approval to pay out dividends and might be asked to submit a recovery plan.

The Dutch insurance industry's representative body says the proposed theoretical solvency criterion – theoretisch solvabiliteitscriterium – is flawed and will put Dutch insurers at a competitive disadvantage vis-à-vis their peers in other European countries.

To calculate the new capital standard, insurers will have to stress their Solvency I balance sheets with a suite of Solvency II-style shocks, including equity risk, interest rate risk, property risk, spread risk, counterparty default risk, longevity and mortality risk and cost risk. A diversification matrix similar to that used in Solvency II will be applied to the result, which will in turn be multiplied by a scaling factor to bring the figure to a 1/200-year shock level.

But the details of the scaling factor have yet to be decided and this is fuelling the industry's hostility. "The theoretical solvency criterion will be submitted to a yet-unknown scaling factor, a black box, which is not transparent and is not explicable to external investors in listed companies", says a spokesperson for the Verbond van Verzekeraars (VV), the association of Dutch insurers.

Another concern is that while the regulatory capital standard uses some of Solvency II's assumptions, it lacks the measures to ease the burden of policies with long-term guarantees in times of stress.

Supervisors will also be given a power of veto over any transaction that would worsen the capital position of the firm, such as upstream transfers of capital. This measure is likely to harm capital fungibility of some of the big financial groups and cross-border insurers that hold a sizeable share in the Dutch insurance market.

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