Regulatory burdens vs risk minimisation: where should the balance be struck? Are insurance suppliers justified in moving away from certain industrial risks, increasing premiums, reducing capacity...? What kind of problems are insurance buyers facing in the current environment? And are the brokers doing enough to protect buyers in all of this?
Do small insurance companies widen the choice in the market, promote specialisation, provide capacity in areas that do not attract the big players? Will small insurers be spared the full impact of Solvency II and would this be at the cost of staying out of the cross-border market? Should Solvency II be concerned with the level of competition in the market?
How much would a court be ready to rely on an agency rating in assessing an insurance buyer's responsibilities in a case where the provider defaults on a claim? What could be the responsibilities of the rating agency in this case? Would the regulation of rating agencies have any effect on this? Could captives provide a solution to minimizing counterparty risk?
These and other issues challenging the foundations of the insurance industry today were at the heart of the debate during an executive forum organised by Business Insurance in Frankfurt last month. The event brought together the views of top industry bodies, operators and regulators providing a comprehensive overview of the key ideas that are influencing industry developments going forward.
Wolfgang Rief, Director Insurance at Standard & Poor's, dwelt on the objectives of Solvency II from a rating agency's perspective and outlined the expected impact of Solvency II on European insurers, saying the directive is not expected to produce a big bang but rather to consolidate the supervisory framework and risk management practices which companies and insurers should already be following anyway. Peter Klatt, managing Director of BMW's captive reinsurance company Bavaria Reinsurance Malta Ltd looked into the way companies should be preparing for Solvency II, setting the scene for a three-way exchange of ideas among Stefan Sigulla, president of the German commercial insurance buyers association DVS, Peter Dan Dekker, the newly appointed president of the Federation of European Risk Management Associations FERMA, and Marisa Attard, Insurance Director at the Malta Financial Services Authority.
Mr Sigulla, who is also Insurance CEO of Siemens AG, said that going forward regulation is likely to be looking for ways in which insurers should be building reserves during the better times to help them remain stable in times of turmoil. European regulators would also be seeking to strengthen the framework for exchange of information with third countries. Generally speaking, companies will, in turn have to bear the increased costs of introducing better risk evaluation systems and adopting stricter underwriting guidelines. As far as increased sensitivities about counterparty risk are concerned, corporate groups may do well to explore alternative options such as organising residual risk in a well capitalised captive company.
Mr Dekker, corporate insurance risk manager at Netherlands-based Stork N.V., said he will make it his top priority at FERMA to ensure that insurance buyers' concerns over the impact of Solvency II on captives and on the availability and cost of insurance coverage are well understood by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the European Commission.
Dr Attard said the Maltese regulator understood the concerns of small insurance companies and captives and has regularly brought this up at European level. She said that Solvency II's qualitative approach could actually sometimes favour these companies in terms of the level of capital they would need to retain, as demonstrated in the recent QIS 4 exercise.
However, she emphasised that this could be the exception rather than the rule and that smaller companies could perhaps be better organised to make their voice heard through industry associations, such as the European federation of insurance companies (CEA), and intensify their participation in consultation and assessment exercises conducted by CEIOPS. She shared the view that buyers' interests can be better served in a Solvency II context if the competition provided by small insurers and captives is not stifled. Dr Attard also encouraged the industry to participate in upcoming European reviews related to insurance intermediaries and compensation schemes.
The debate was moderated by Adrian Ladbury, international editor of Business Insurance. The proceedings are available as a webcast produced with the support of the MFSA. Details available are from communications@mfsa.com.mt.