Thursday, 5 April 2012
Spanish insurers fret over Solvency II ORSA requirements but gloss over eurozone threat
Spanish insurers are worried about a key element of new governance requirements that will be introduced by the forthcoming Solvency II Directive.
Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy
A top executive at Mapfre, the country’s largest insurance group, even compared the Own Risk and Solvency Assessment (ORSA), a new process that is part of the Pillar II element of the directive, as a ‘ghost’ that haunts the industry.
The remarks were made during a morning-long session dedicated to ORSA at Semana del Seguro [week of insurance], a high profile event hosted annually in Madrid and attended by large numbers of the country’s insurance industry.
The ORSA rules demand that insurance companies must have internal risk assessment processes in place in order to manage non-quantifiable risks, which are not reflected in the capital requirements established by Pillar I of the directive.
ORSA will not be evaluated by supervisory authorities but they will want to be reassured that adequate processes are in place, as the provision is seen as an important tool for insurance companies to identify long-term risks.
Participants in the debate highlighted advantages of the ORSA approach, deeming the focus on long-term, non-quantifiable risks as a desirable addition to the infor-mation tools used by insurance bosses as they set up business strategies according to the risk profile of their companies.
“ORSA is a risk management culture that must trickle down all sectors of a company,” said Miriam Blazquez, the Head of the Insurance department at Dirección General de Seguros y Fondos de Pensiones, DGSFP.
She noted that supervisors will check the implementation of ORSA closely, and will demand documentation to prove that it has been followed.
But the final end of the processes should be to help companies make risk-based decisions themselves. Otherwise, the whole exercise will be a waste of time and money, pointed out Ms Blazquez.
Ultimately the process should help to increase the transparency of insurance companies by urging them to present detailed information in an understandable way. This could prove to be very different given current practices, according to experts.
“The insurance sector is difficult to understand, and has a reputation of being obscure,” said Carlos Montalvo, the Executive Director at EIOPA, the European insurance supervisor that is preparing Solvency II.
He tried to quell industry fears by stating that ORSA is not a tool for supervisors to tell insurers how to run their business, nor a model that will be forced on companies by the authorities. In fact, each insurer will have freedom to implement the model that better suits them, he said.
“ORSA will enable companies to see themselves as they are today and in the future too,” he remarked.
Mr Montalvo added that the information must be easy for the board to understand.
But Mercedes Benito, a Financial Director at Unespa, Spain’s insurance association, expressed fears about the nature of the information that will be presented to supervisors under the ORSA requirements.
She said that not all information insurance companies manage is of interest to the public, and strategic data relevant to their activities should not be disclosed as it could affect their businesses.
The impression given by representatives of the industry during the debate is that it is still not clear how ORSA will be implemented and how much it will increase the administrative burden on companies.
Ms Benito said that, in general, governance systems to be implemented as a result of Solvency II should not be a problem for insurers because many of them already have such systems in place. But ORSA remains a concern as it constitutes a new requirement for the market.
“ORSA is like the ghost of Solvency II,” said Juan Pablo Olmo, a Deputy Director to the Secretary General at Mapfre, Spain’s largest insurance company. “Everybody knows it exists. Everybody knows a little bit about it. But we have seen very little, in a clear way, of what ORSA is. And the truth is that, for the most part the audience here today, it generates some uncertainties.”
Solvency II was one of the main subjects discussed during Semana del Seguro, as the insurance industry debated the changes that are coming its way because of economic and regulatory developments.
During the event, Spain’s new insurance supervisory boss presented the latest statistics about the insurance market, which shows an industry that is doing better than the overall domestic economy.
Flavia Rodríguez-Ponga, who took over as Head of DGSFP earlier this year, noted that premiums finished in 2011 some 4% higher than in 2010, which is more than double the rate of growth of Spanish GDP. Non-life premiums, however, were mostly stale, having increased by only 0.7%.
Despite the positive numbers, there is still concern within the industry about the effects of the long running crisis on the business of insurers. “It is true that anyone who looks at our numbers could think that, in the middle of the storm, we live in the best of the worlds,” said Pilar González de Frutos, the Chairman of Unespa, the insurance association. The situation, however, is not as comfortable as it may look, she said.
For instance, she warned that, as a result of the current crisis, Spaniards are saving much less money via their pensions, which is a worry for the industry and the country as a whole.
She said that, in 2010, Spaniards saved on average €0.54 out of every €100 of income, which is considerably less than other Europeans. By the end of 2011, the number had fallen to €0.07.
Ms González also stressed the challenges that companies are likely to face because of uncertainties that surround the final form of the Solvency II Directive.
In fact, several challenges lie ahead for the insurance industry in Spain.
For instance, the dire state of Spain’s finances and suspicions about the country’s banking system have prompted justifiable ratings downgrades of Spanish insurers by agencies such as Fitch and Standard & Poor’s.
The Spanish insurance industry has gone through several years of soft market, casting a shadow on technical results, which have only held up because the sluggish economy has kept losses down.
It also needs to adapt to the tough Solvency II rules that will start biting next year.
The investment portfolios of Spanish insurers are filled with sovereign bonds issued by Spain and other countries at risk and remain under threat while politicians fail to come up with a definitive solution to the eurozone debt crisis.
But none of the issues above deserved much attention of Spanish insurance bosses, including the new Chairman of Mapfre, António Huertas, who took part in a high profile debate during the event.
Instead, the group of bosses spent one and a half hours explaining how their companies have turned themselves from policy sellers to solution providers, how lucky they are to be packed with talented people who treat customers like kings and how they help Spain to maintain its welfare state.
Most of the few, timid efforts to raise real issues during the debate were performed by Jaime Anchústegui, the CEO of Generali España.
He noted that the technical results of the insurance industry will be under pressure in the near future, particularly if the Spanish economy finally picks up steam and the volume of losses climbs as a result.
Mr Anchústegui also stressed the need for the insurance industry to be more transparent in its relationship with insurance buyers, both individuals and companies, and with society as a whole. “Transparency is extremely important, and not only because of Solvency II,” he said.
The other participants of the debate were Javier de Agustín, the General Director of AXA in Spain, Juan Hormaechea, the General Director of Insurance at Mutua Madrileña, and Jesús Priego García, the CEO of Santalucía.