Blog: Solvency II accelerates competitive rethink

Solvency II always looked like more of a headache for life insurers than their counterparts in general insurance - it was certainly all the wrangling over life liabilities that held things up for so long, albeit perhaps the biggest worries were on the Continent, not in the UK.

Now that Solvency II is finally up and running, this is still the sense I get from talking to my clients and the regulators. Some GI firms are holding more capital, especially now solvency ratios have come under such an intense spotlight. But so far at least, there's been no discernible dent in dividends or rise in the cost of capital as a result of the new regime.

Unwelcome distraction
It's not all plain sailing, however. Complying with Solvency II continues to create a lot of work, which is adding yet more distraction to a non-life sector already grappling with enduringly soft rates, concerns over claims inflation, and rapidly shifting customer expectations.

New hurdles from Solvency II will emerge through 2016 and into 2017. In particular, the big reporting demands could stretch a lot of businesses when they kick in early next year, especially as the turnaround times are squeezed.

Eventually there should be benefits from all the investment in Solvency II, including sharper risk selection, keener pricing and better control on claims costs. But most GI firms have yet to see this.

Changing business models
It's little wonder then that there's so much talk in some quarters of the market about whether we really need all the cost and distraction of Solvency II. This discussion has only been amplified by the EU referendum debate: if we left the EU, would we still have something like Solvency II in the UK?

The real competitive strengths for many non-life businesses are customer profiling, marketing or claims service. Many of these firms are wondering whether they could let better-equipped businesses hold the capital on their balance sheets and handle the reporting demands. This would leave the customer-orientated firms with a lot more of their precious time, energy and investment to concentrate on the innovations in digital interaction and data analytics they need to compete.

These developments might provide a further spur for consolidation or disaggregation. You could see the benefits for risk-bearing insurers looking to bolster scale and extend the benefits of diversification. Insurers that focus on service and no longer need to hold regulatory capital could in turn become targets for brokers.

Keeping your eye on the ball
For me, the other big priority is ensuring that all these new compliance demands don't deflect from the reserving issues that are coming to the fore after such a prolonged period of subdued rates. Solvency II has been put in place to strengthen market resilience and policyholder protection. But for now at least, under-reserving looks like a bigger potential threat than under-capitalisation.

So, while Solvency II isn't likely to be the big game changer it's been within the life sector, it still raises plenty of questions for non-life businesses: How can you reduce the burden? How can you realise the benefits? And, if neither seems possible, is it worth thinking about Plan B?

Jim Bichard
Partner, PWC