Clifford Chance
Solvency II - What insurance companies need to know about the new regulatory regime
19 July 2011
Solvency II, the European Commission's new regime for insurance regulation, is likely to trigger a rise in M&A activity in the insurance sector because of the increasing regulatory and compliance burden it will place on insurers.
Although there is continuing uncertainty over the exact date for the introduction of Solvency II, an increase in M&A activity is likely to be one of many changes driven by the new regulatory regime.
Over the past few years, corporate and M&A activity in the insurance sector has slowed down as insurers have held back from deal-making partly because of uncertainty over the impact the new regulatory regime may have on the valuation of insurance companies.
However, M&A activity is likely to increase if smaller insurers, for example, find it difficult to remain competitive when they have to raise the additional regulatory capital needed under Solvency II, or to fund its greater compliance and reporting requirements. For other insurers, there will be an incentive to divest less profitable or businesses which are more capital intensive under Solvency II.
Speculation over the timing of Solvency II's introduction began recently when the draft Omnibus Directive, which is expected to confirm 1 January 2013 as the implementation date for the new rules, was itself delayed.
While the European Insurance and Occupational Pensions Authority (EIOPA) has said there will be no delay to Solvency II and the UK's Financial Services Authority (FSA) has also confirmed that it is still working towards an implementation date of January 2013, uncertainty remains which is damaging for the industry. Insurers have been waiting for Solvency II for some years and now need certainty both as to the detail of the regime and when it will take effect.
The introduction of Solvency II is also likely to have a significant impact, in the longer term, on the investment policies of insurers.
Unlike Solvency I which requires insurers to use investments that are on a specified list of admissible assets to support technical provisions and capital resources, Solvency II will not have any prescriptive rules. Insurers will have the freedom to invest so long as they follow the "prudent investor" principle to ensure that their investments are in assets that can be properly monitored and that other criteria such as the safety, quality, maturity profile and diversification of the assets are met.
But insurers will also have to assess various specific categories of risks for each asset and will have to hold additional capital to cover such risks. The currently proposed asset charges could severely curtail insurers' traditional role as long-term investors in both debt and equity markets.
