17 May 2013

CRE: Pricing challenges and Solvency II dominate discussion at European Insurance Forum

Marty Becker, CEO of Bermuda-based reinsurer Alterra Capital, which was recently acquired by Markel, highlighted the pricing issue when asked to identify the key risks facing the insurance industry. "There has been a move to non-traditional assets without changing liabilities. This works until it doesn't work and then it is painful. How are we going to persuade buyers to change their attitude to allow us to price to get a ROE that covers our cost of capital? That is the game we are playing right now", he added.

The conference also featured a speech from the Central Bank of Ireland's Head of Financial Regulation, Matthew Elderfield. In what is likely to be his last public speech before taking up a new post as head of compliance at Lloyds banking Group on the UK in October, Mr Elderfield accepted that the 'drawn-out process' of Solvency II implementation had resulted in 'fatigue and frustration' as well as an increase in implementation costs.

However, he added that there were compelling reasons for the regulation. "It is unacceptable that the common regulatory framework for insurance in the 21st century is not risk-based and only takes account of one side of the balance sheet. It urgently needs a framework that encourages better governance and management of risk. And it urgently needs a framework that provides better disclosure to market participants, on a consistent basis, of the health of insurance companies", he said.

The risk-based framework has resulted in more complexity that "has clearly gone too far in some areas and made implementation very difficult for small companies", said Mr Elderfield. "But the benefits of moving ahead with Solvency II outweigh the costs and risks of retaining the existing framework and a myriad of competing national regimes."

The one issue that has stalled the implementation of Solvency II is whether long-term guarantee products should be treated to the same evaluation as other insurance liabilities under the Directive. Until a balanced compromise is found, it is important that a credible new timetable for implementation is found, said Mr Elderfield.

EIOPA issued proposals for interim guidelines on 27 March that Mr Elderfield said were important in order to 'maintain momentum' and "prevent drift and divergence in the single market". Mr Elderfield also pressed the case for continued strong regulation in Ireland. "At some point the debate about over-regulation and supervision will return, if indeed it has ever gone away. That is healthy and reasonable. But I would hope that debates on regulation and supervision are done transparently and that they are given short shrift if they take place as a vaguely articulated concern about burden and competitiveness without being grounded in specifics to ensure an informed debate on policy."

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