Are you ready for Solvency II?

The industry has generally been supportive of a higher standard of regulation, but is increasingly worried about the true costs and implications of implementation. In particular there is a concern that the final form of the new regime could be unduly influenced by what some see as regulatory paranoia.

In recent months, captive and run off players have complained about a lack of recognition of the issues which impact on their particular sectors. The European insurance federation, the CEA, has been critical of many aspects of the project for some time and has predicted dire consequences if the rules are implemented as currently proposed. Some of the bodies which represent insureds are worried that the regulations may harm consumers by driving up premiums and reducing the number of competing (re)insurers in the market.

There have been calls for the timetable for implementation to be extended to allow for real world testing of the new regime. In early March, the head of the German insurance watchdog Bafin suggested the go-live date be put back to 2013. Thomas Steffen (a former chairman of CEIOPS) said "when it comes to Solvency II, I advocate the principle of quality before speed". This sparked press conjecture that the timetable might indeed be put back.

The European Commission's response to this speculation was swift and unambiguous. Unleashing the forces of (Karel Van) Hulle at an Insurance Institute of London lecture, the point was unequivocally made - Solvency II will come into effect in October 2012 and there is no room for negotiation.

If resistance is useless, although firms can lobby to try to influence the regulations' final form, they need to remain focused on being ready in time and on trying to make the best of the opportunities that being compliant from day one can offer.

Fully integrated internal models which satisfy the "use test" should help in the management and decision making process. Increased data and information obligations can drive improvements in information technology infrastructure - it was recently suggested that IT accounted for 40 per cent of Solvency II spend. The enhanced reporting and supervisory obligations will improve transparency and could enable well run firms to better communicate their messages. Firms which have fully engaged with the demands and challenges of the new regime should be better placed to compete on Solvency II's level playing field.

In addition to possible operational and management benefits, the capital requirements of the new regime should prompt firms to look at the businesses they operate and the structures they employ. Capital intensive businesses may be disposed of or run-off, diversification and consolidation will be important drivers and pan European restructurings with a focus on networks of branches instead of subsidiaries may become more common. This in turn may lead to acquisitions and disposals of companies and businesses, portfolio transfers, schemes and the development of more effective and efficient run off and commutation strategies.

There is a cost associated with this sort of activity but many of the changes are not optional and the price for Solvency II related expertise is likely to go only one way – indeed, the market has been compared to that for IT specialists in the run up to Y2K.

Regulatory change is coming, and companies and groups should therefore take advantage of the opportunity to ensure they are "fit for purpose" in the new world.

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