This month, the European insurance and reinsurance federation (“CEA”) published a report on the financial requirements of Solvency II and the costs and risks arising from excessive capital requirements.
The CEA has strongly endorsed and fully supported the development of the Solvency II regulatory regime, and sees it as a positive step forward for insurance sector regulation. However, it notes that overly prudent or excessive capital requirements might have a downside for policyholders, the overall economy and insurers. According to some recent estimates, the required solvency capital under Solvency II could be as much as 65-75% higher then the standard model calibration under the fourth industry wide quantitative impact study, and represent an additional capital burden of 30-50% on the sector.
The CEA believes that placing excessive capital requirements on the insurance industry would mean that: (1) individual insurance companies may increase the price of more capital intensive products, reduce policyholder coverage and benefits, and reduce underwriting capacity on the most affected lines; (2) the insurance industry as a whole could see reduced investor returns, which may trigger a reduction in new capital investments, reducing in turn the underwriting capacity in the industry, and increasing funding costs, which may put European insurers at a disadvantage in the global market; and (3) policyholders may suffer an increase in the price of cover (particularly for life products), retirement funds may go down, and products may be redesigned.