Unless you are the CEO of an already thinly-capitalised European monoline mutual catastrophe reinsurer, then the feedback and reaction to the fifth quantitative impact study, QIS5, on the likely impact of Solvency II will be welcomed with open arms.
If you are, then you better start looking for someone to buy your company or start writing a bunch of uncorrelated lines that your underwriters know nothing about in markets that you have never even visited and hope for the best.
The study was good news for the bulk of the market. The analysis, which boasted participation from 70% of the European insurance market, showed that overall the European industry has enough capital to swallow the worst that the European Commission can throw at it.
Only 15% of those who took part would fail to hit the standard capital requirement (SCR) and 5% would miss the minimum capital requirement (MCR) and therefore see their licence threatened. Most expected the figures to be much worse than the last quantitative impact study, QIS4, but that did not transpire.
You can forgive industry bodies such as the European insurers’ federation, the CEA, for enjoying their moment of ‘we told you so’. The study appears to strongly underline the fact that the industry really did weather the credit-crisis-inspired storm as well as the CEA has vehemently argued over the last two years and do not need to be hammered by an extreme set of new capital requirements designed for the banks.
That is not to say it is all rosy in the European insurance garden.
Fifteen percent under the bar is still a scary figure and one has to presume that the 30% of companies that did not take part in the study will be those that would also struggle to make the numbers.
Those that used internal models fared much better than those that did not and one has to again presume that the missing 30% did not take part because they did not have the resources to do so and therefore are unlikely to be in a fit state to come up with a credible internal model, that gives much lower capital requirements.
A simplistic analysis would therefore suggest that up to 45% of the European market may struggle to meet the SCR under Solvency II as envisaged by the European Insurance and Occupational Pensions Authority (Eiopa).
Also, it is still clear that the calibrations in the present form are not so kind to non-life insurers in general and particularly catastrophe insurers. Specialists agree that the study will accelerate strategic decisions about capital management and allocation within the European insurers and, despite the relatively positive results, still lead to mergers and acquisitions.
This will only serve to intensify concerns among commercial customers, who still fear a dramatic fall in capacity and rise in prices for their more difficult to transfer risks at a time when they really need the help.
And the large life and pensions providers still hold serious concerns about the impact of the proposals on long-term guarantee business that rely so much on assumptions and revenue recognition based on risk-free curve rates and illiquidity premiums and the impact of volatility in instruments over time to make them work.
The second set of good news to follow the initial calculations on capital requirements was that both Eiopa and the European Commission publicly agreed that further work is needed before the Level 2 implementation measures are put to bed by the end of this year. The hope is to make it simpler, less prone to volatility in markets and to reconsider important elements such as the catastrophe risk calibrations and chunky issues on long-term guarantees.
Coming on the back of the recent news from the European Commission in its Omnibus II package that it would consider transitional arrangements for key elements to extend as long as 2023, the various lobby groups will surely soon be running out of things to moan about?