Solvency II – the Main Issues

Solvency II is trying to achieve both a consistent and comparable regime across the EU and also a level playing field for insurers so that they will compete on an equal footing in the different Member States. To achieve this, the views of regulators, finance ministries, tax regimes, industry competitors and consumer groups have been sought on a pan European basis. The result of this has been an array of many differing viewpoints and positions some of which still remain to be reconciled, even though deadlines to implement the Solvency II regime on time and in full are getting tighter.

The main issues affecting UK Life firms are the following:-

• There is a risk of excessive costs, compared to the benefits of Solvency II.
• Transitional arrangements will be required but it is unclear what these will be.
• Not all Own Funds held by the industry will be eligible to offset capital requirements and fresh capital may have to be raised.
• The illiquidity premium which offsets certain short term market fluctuations, in the case of long term or held to maturity contracts, may not be properly taken into account.
• Arrangements to allow for regimes in Non EU countries to be assumed to be equivalent may prove unsatisfactory.
• Large counter party default capital charges may be inappropriately made for internally reinsured business.
• Cashflows in respect of future premiums on some contracts which should be taken account of may not be recognized on the balance sheet.
• There are potential onerous reporting requirements which will result in inappropriately high costs involved in meeting the requirements.