A joint research conducted by Towers Watson and Bain & Company showed many European insurers are ill-prepared for the minimum capital requirements of the Solvency II environment and may not able to earn more than their cost of capital, even if the roll-out is postponed till 2014.
“Our analysis exposes considerable weaknesses in the solvency ratios and risk-adjusted profitability of European insurers under Solvency II,” said Gunther Schwarz, partner at Bain & Company.
The authors of the study concluded that “aggressive action” needed to be taken after their research in the life, health, property and casualty sectors in the UK, Germany, France and Italy found adverse liquidity effects after Solvency II is brought in.
The simulation model had considered the risk-adjusted profitability ratios and the extent to which their assets were covered by their solvency capital for all major insurers in the region.
The analysis showed 21 percent of British insurers have less than 100 percent solvency ratio, which was attributed to a larger-share of annuity insurance in the UK.
Just 8 percent of British insurers in the property and casualty sector had less than 100 per cent solvency, despite the fact that capital requirements under Solvency II regime are to rise by more than 200 per cent.
“Companies will have to carry out extensive groundwork to optimise their capital and risk before the new EU regulations are in play. Insurers will also have to realign their corporate strategy, organisation and culture to these new conditions which is a Herculean task,” said Mr. Schwartz.
There are opportunities as well, he added. “The entire insurance market is in a process of transformation. This is an ideal opportunity for sector leaders to further expand their market positions,” he said.
Insurers must wake up to the challenges posed by Solvency II, said Naren Persad, director of Tower Watson and warned against further delays.
“Even medium-sized companies will need a good two years to implement the changes. Realigning a business model within this period would still be an ambitious task even if the introduction were postponed to 2014,” said Mr. Persad.
However, not everyone seems to be convinced with the outcome of the study. “The problem with these studies is that whenever you do a calculation, the models that are used are making assumptions so every calculation is fraught with variables that determine whether or not it is a sound calculation. All you need is for one variable to be wrong and the whole calculation is thrown aside,” said partner at Highclere Financial Services.