Agreement has been reached on the Solvency II directive, but now begins three years of hard work for European insurers who must struggle to comply with it

Agreement on Solvency II, the most important piece of legislation affecting European insurers and reinsurers, has finally been reached but at the cost of a political fudge that leaves out one of the most important parts of the new regime: group support. This crucial component of the original directive was opposed by some nations, including Spain and Poland, who were worried that it could undermine the power of their national regulators. The deadline for compliance has also been pushed back to 2012 and when deadlock threatened to delay Solvency II further, group support was dropped as a matter of expedience.

Group support was an imaginative idea that reflects economic realities and would have allowed subsidiaries in European groups to meet local solvency capital requirements by a financial commitment from their parent. This would have enabled European groups to manage capital centrally. Without group support, subsidiaries will be forced to maintain financial commitments in each country of operation. This costs groups more.

So why did the fudge happen? The sad answer is that politicians, desperate to be seen to be acting in response to the financial crisis, allowed themselves to be pressured into a deal. They wanted the deal done quickly just to be seen to be doing something. Solvency II is being billed as an “answer” to the financial crisis. Whether in reality it would ever stop a financial crisis originating in the insurance industry is anyone’s guess. Basel II did not stop the financial crisis in the banking industry.

Brussels, the home of the waffle, fine chocolate and an excellent range of fruity beers, is also no stranger to fudge – including the political variety. But it would have been better to have the courage to delay the Solvency II directive and iron out the real differences that exist over group support, rather than go off half-cocked. European insurers are now engaged on the burdensome task of preparing for compliance with a version of Solvency II that is far removed from what was originally planned.

One solution that some insurance groups are considering is replacing their foreign subsidiaries by branches. But this is a costly solution. Also, many consumers will be put off if they are asked to buy from the branch of a foreign company.

Insurers are now studying the directive in detail. To say they are finding it difficult would be an understatement. Also, the directive only contains high-level principles, not the implementation measures and guidelines. Much of the detail that will flesh out the directive will not be agreed upon until 2011, only a few months before the implementation deadline.

Unfortunately, many insurers, large and small, will struggle to comply with this complex example of European regulation

Key points

.• Agreement on Solvency II was reached by means of a political fudge

• Group support, a key part of the original plan, has been left out

• Compliance will be complex and expensive for insurers