Solvency II will change the insurance and reinsurance market across the European Union.
Captives
Quantitative Impact Study 4 ("QIS4") is considering the application of the proposed group supervision regime for insurance groups. Much business within the insurance market is carried on by insurance groups, or financial conglomerates which have activities across several sectors. The specific risks that such groupings present include double counting assets, or insolvency spreading through a group, problems which the Insurance Groups Directive, adopted in 1998, does not solve.
The Solvency II approach is that joint supervisors will be appointed in respect of each group, taking account of all jurisdictions in which the insurer is present.
The Solvency II approach to group supervision has caused concern about its impact on captives. One view is that if captives are forced to meet the capital and reporting requirements proposed for commercial insurance companies, many would struggle to survive. Given that the primary purpose of Solvency II has been stated as consumer protection, it has been questioned to what extent this can be considered an issue for a captive company. In addition, with increased capital requirements and supervisory reporting burdens, the number of new captives setting up within the European Union could decline significantly.
Clubs
Solvency II will change capital adequacy regimes and risk management standards for P&I Clubs.
In a July 2008 letter to members the Chairman of the UK P&I Club, a mutual, noted that the Club had approved the issue of around $100 million of callable perpetual subordinated debt or "hybrid capital". Whilst a more common tool in the commercial insurance industry, this is an unusual step for a mutual.
The UK P&I Club securities have a 9% coupon in the first 5 years, a floating rate after 5 years with a pre-determined spread and, after 10 years, another 1% is added to the pre-determined spread.
It is interesting that Solvency II debate has filtered to the Clubs and such an innovative approach is only to be applauded. A more compelling (short-term) reason for Clubs to raise more capital is the turmoil in the equity markets. Many Clubs hold a significant proportion of their assets in equities which exposes their balance sheets to volatility. For those Clubs that have a rating from one of the rating agencies, a downgrade in the rating caused by market volatility can be avoided by raising more capital.
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