Solvency II: a European compromise

The three European authorities – i.e. European Commission, European Parliament and European Council – have reached an agreement to approve the implementing measures of the Solvency II directive.
The decision closes out a legislative process started over ten years ago and it will have a significant impact both on the European insurance industry, and, indirectly, on the economy of the entire continent. Besides banks, indeed, European insurers have new prudential rules as well.

Insurance companies are the main European institutional investors with an investment portfolio of  €8,500 billion accounted for 64% of government securities and corporate bonds, and for 15 % of equity funds. In the current economic situation, they are indeed called upon to play a leading role in supporting the economy: a role that is even more important than in the past because of the difficulties of the credit world.

Solvency II

The new prudential supervision rules will intervene on each investment choice, having thus significant effects on financial decisions of each Insurer. This situation, together with the need to adapt the new rules to situations of financial stress as those experienced by Europe during the last period, explains the laborious procedure of the measure as well as the importance of the compromise that has been reached. For this reason, the European Parliament, the European Commission and the Eruopean Council have decided to prepare a series of measures, that are the result of a long mediation between the interests, often very different, of the European Union countries, and that would allow groups to operate “safely” even in adverse market conditions.

To minimize the volatility of financial markets, Insurers will apply the volatility balancer mechanism, which, in certain circumstances, increases the rate from which companies liabilities are discounted.
In Italy, according to initial estimates, they calculated that with the new mechanism they will release about € 8 billion of reserves, i.e. around 2% upon the whole. This will result in an improvement estimated at about 16 points compared to the Solvency II ratio simulated by Ivass as of the end of 2012. Compared to rules in force, Solvency II redoubles capital requirements of Insurers, but without involving further recapitalizations by Insurers that have sufficient capital resources .

The new rules of the Solvency II will apply from January 1st, 2016, but their introduction will require a major transitional phase.

The new Solvency version meets Insurers demands, especially in relation to the fair value measurement of certain investment categories.
Solvency II seems to be the answer to the need of having rules that apply to all markets, in the same way, across whole Europe. (Ania)