Insurers must learn to live with it, European regulation bosses tell ABI conference

European regulation bosses have defended moves in Solvency II to give greater exposure to insurance companies’ balance sheet volatility.

Under the directive, European insurers will have to be more transparent than they are currently about their capital requirements when they submit regulatory reports.

Insurers from across Europe are worried that investors will take fright if and when the reports throw up big fluctuations in insurers’ capital pictures.

They have urged the European Commission to include in Solvency II so-called “volatility dampeners”, which would enable capital requirements to be relaxed for insurers suffering from deteriorating assets.

But at the ABI’s Solvency II conference last week, the Commission’s insurance and pensions unit head Karel van Hulle defended the directive. “If there is volatility in the market, the worst thing in the world is to ignore it. You have to learn to live with the volatility. Volatility is normal rather than exceptional.”

Van Hulle was supported by Eiopa (the European Insurance and Occupational Pensions Authority) executive director Carlos Montalvo. In his speech to the conference he said that, under Solvency II, insurers would need to “educate” their board members, investors and supervisors that even dramatic fluctuations in capital levels were “not the end of the world”.

But the director-general of European insurers’ umbrella body CEA Michaela Koller said her members remained concerned about the greater volatility they would be exposed to under the new regime.

In a bid to reassure insurers, Montalvo told the conference that he “did not care” about the standard capital ratio – the higher of the two key solvency benchmarks contained in the directive – describing it as “an invitation to a cup of coffee with your regulator”.

He also announced that Eiopa would be carrying out a fresh stress test of the EU’s insurers in 2012, although the exercise would not be carried out using the Fifth Quantitative Impact Study (QIS5) framework used earlier this year.

He said: “It’s not going to be done on the basis of QIS5, which is no longer a valid reference point.”

In further unwelcome news for the industry, Montalvo said that the European parliament vote on Solvency II key building block Omnibus II has been postponed from the week before Christmas. The vote, which was originally set for November, is not now due to take place until April, following an announcement by the European parliament.

Montalvo admitted that delaying the vote would mean less time for haggling between the parliament, the Council of Ministers and the European Commission over the final shape of Omnibus II. But both he and van Hulle downplayed the significance of the successive delays.

City minister Mark Hoban said the wider eurozone crisis was not an excuse for stopping work on Solvency II. At the conference, held the day before last week’s crunch EU meeting on the eurozone rescue package, he said: “I don’t believe that instability in the Euro area means we should pull the plug on regulatory reform.”

He told the gathered insurance industry representatives that the long-delayed directive provided opportunities for the UK industry.

Hoban said: “It’s an opportunity for insurers to provide more granular products and to compete on economies of scale. Long term, I hope it will lead to increased investment returns.”

We say …

● The European Commission wants insurers to be more transparent about how much capital is held on their balance sheets.

● But the entire Solvency II project was dreamt up in conditions far removed from the colossal market fluctuations of today.

● The objective is worthy, but the timing is wrong. Insurance is a long-term game and it would be rash to allow a company’s fortunes to be capsized by one quarter’s result.