Thursday, 13 October 2011
Solvency II could increase systemic risk and stifle innovation warns panel
The Solvency II Directive could fuel a herd mentality among insurance companies and increase systemic risk by promoting the widespread use of investment models, risk managers were told during the Ferma Forum in Stockholm.
Lex Baugh, Chief Executive Officer at Chartis Europe
During the closing session of the event top insurers and brokers also expressed concerns about the possible effects of the Directive on the ability of insurers to provide new, innovative solutions to buyers.
Lex Baugh, Chief Executive Officer at Chartis Europe, noted that Solvency II is unlikely to cause traumatic changes in the market. “It has become clearer that certain types of business are going to exact bigger capital charges. But I don’t think it is going to lead to a dramatic shift,” he said.
But he fears that the Directive could have unwanted effects on the investment policies of insurance companies, especially as they will need to fit their strategies into mathematical models. “In 2007 and 2008, (banking) systemic risk was created by models,” Mr Baugh said. “If you look at the way we are building up models for Solvency II there are basically three suppliers in the market, and everybody is using a derivative of one of those models.”
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He added: “Talking about investment risk, if people start to aggregate their investments towards an asset class because it is particularly favoured, this is the kind of thing that can happen in terms of how we allocate our capital as insurance players.”
If that proves to be the case the Directive could have the opposite effect to its intentions, continued Mr Baugh. “We did a pretty good job to minimise the concerns of all stakeholders about systemic risk in our industry through the last crisis,” Mr Baugh said. “We have to watch that Solvency II does not influence us into more of a herd mentality in the way we manage our investments.”
Greg Case, Chief Executive Officer at AON, also expressed concerns on whether Solvency II will be able to deliver more peace of mind to investors in the insurance market. “The capital cost is clear, but it is less clear that it will create less volatility,” he pointed out.
For his part, Jeff Moghrabi, Country Manager for France at ACE, highlighted that the higher capital requirements to be imposed by the Directive are likely to hinder the ability of insurance companies to innovate. “We do not need more regulation,” he said. “Solvency II is already costing a lot of energy to the industry. That energy could be better dedicated to improving risk modelling and risk analysis or to innovation.”
But participants have also told of positive developments that Solvency II is likely to bring. August Pröbstl, Senior Executive Manager, Corporate Insurance Partner at Munich Re, mentioned that captive owners were historically more concerned about things like capital levels and innovation, but now they are looking at the problem from a strategic point of view, which could help boost their profile within their organisations.
“Concerns about Solvency II have shifted towards how companies can turn captives into strategic assets,” he said. “It involves a lot of quantitative information as they are talking more about capital efficiency and risk return profiles, and that is a language that CFOs can stop and think about.”
David Batchelor, Chief Executive Officer at Marsh, remarked that even though there remain concerns over Solvency II preparations are under way and the market is unlikely to be caught unawares. “In 2014, or even 2013 in the UK, it could be pretty much the equivalent to the Y2K virus, which was a damp squid in the end in terms of impact on the corporate world,” he said.
He was referring to fears, finally proved to be unfounded, that computer bugs would cause widespread destruction of databases at the turn of the millennium.
Mr Batchelor also stated that stakeholders should benefit from Solvency II as it will create a common platform to evaluate the financial health of different insurers.
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