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18 November 2010

Upcoming challenges and opportunities for the insurance and reinsurance sector


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Die Krise hat Schwachstellen in den Überwachungssystemen verdeutlicht, und die Kommission wird weitere Regulierungen des Finanzsektors durchsetzten. Die Vorschläge beinhalten auch eine strengere Aufsicht systemisch relevanter Institutionen, was auch Auswirkungen auf die Versicherungswirtschaft haben wird.


The recently approved Alternative Investment Fund Managers Directive (AIFMD), dealing with hedge funds and private equity, will most likely have an impact on the insurance business. All investments that are not considered UCITS will fall under the scope of AIFMD. Many fund managers control plain vanilla funds on behalf of an insurance company. In that respect, the text of the legislation is not clear if there will be an exemption for the insurance industry or not. The future European Securities Market Authority will be key in determining the implementing details of the legislation. Consequently ESMA’s activity should be closely monitored.
 
Another possible source of troubles for the industry could be the Commission’s proposal on OTC derivatives and CCPs - the so called EMIR (European Market Infrastructure Regulation). Almost all insurance companies internally use OTC derivatives with hedging purposes. The Commission proposes an exemption for non-financial corporates if certain requirements are fulfilled, but an insurance company is considered financial and, if the proposal does not change, there will not be an exemption for them.  Under EMIR, OTC derivatives transactions will be centrally cleared which will affect the insurance business model being more expensive to hedge risk with OTC derivatives.
 
Concerning the G20 process, in the Seoul Summit communiqué of 11-12 November (Link) is mentioned a new concept of globally systemic Financial Institutions (G-SIFIs). This newly created category for systemic relevant institutions could set up different levels of systemic financial players and therefore different levels of capital requirements for each “category”. For the time being, the G20 just refers to banks but there is a debate on whether some insurance and reinsurance groups should be considered G-SIFIs. On that point, the Geneva Association (a leading international insurance “think tank”) published a report on systemic risk in insurance on March 2010 (Link) examining the differing roles of insurers and banks in the global financial system and their impact on the crisis. A key conclusion is that, due to the specific features of the industry, insurers’ and reinsurers’ core activities do not pose systemic risks.
 
Finally, Solvency II is the biggest reform of the insurance sector in 30 years and continues to worry the industry, which insists that the implementation of the Directive would have serious consequences on long term investment and on their capability to cover customers' needs. The Commission admitted that there must be a further review to see how Solvency II will impact the industry.
 
One of the key areas of concern of insurance groups is the equivalence criteria (Link) recently proposed by CEIOPS which named Switzerland, Bermuda and - for reinsurance only - Japan as the first group of countries to be considered as potentially equivalent to the Solvency II insurance capital standards. The US could be considered for a "transitional regime" to equivalence. The industry is uncertain on which countries will be classified as equivalent with Solvency II.
 




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