Leaders' Survey
Mitch Blaser
Chief executive officer, Ironshore Bermuda
How important is it for Bermuda to be included in the first wave of Solvency II equivalence testing, and why?
The Bermuda Monetary Authority (BMA) believes that being at the same level as Solvency II will ensure that Bermuda has the same status as the European reinsurers and therefore will not fi nd itself at a competitive disadvantage. Under Solvency II, the amount of capital credit that an insurer will receive will depend on the quality of the reinsurer and the jurisdiction it is from. Bermuda being considered ‘equivalent’ would not put the Bermuda reinsurers at a disadvantage. Due to the amount of capital in Bermuda and the overall impact this capital has on the industry, it is vitally important that Bermuda acquires equivalency status.
What have you learned from the process of getting ready for Solvency II?
That Solvency II rules have changed over the past year and they may continue to change over the coming months. The biggest issue that certain fi rms may face is that there is limited diversifi cation credit for companies that use the standard model to measure their capital adequacy. This will impact smaller fi rms and firms that are focused on catastrophe insurance. The preliminary results show that a number of firms will have to change their operating model or increase capital. Others may end up selling or restructuring their investment due to the reduced return on equity opportunities that the additional capital requirements of Solvency II will represent.
Companies that have not yet made significant progress preparing for Solvency II are taking a risk, particularly since the projected solvency capital required continues to increase with each successive quantitative impact study. This trend means that companies will almost certainly benefi t from having their own capital model, which takes time not only to develop, but also to demonstrate that it is being used in managing the business, as required by Solvency II.
Having gone through the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
"The problem has been more that Solvency II is not a defined thing and will probably end up meaning something slightly different in different jurisdictions, as different regulators interpret and enforce things in different ways."
Solvency II results in both opportunities and a problem. The problem for all companies is that they will need to spend additional money on their compliance and solvency modelling, just to prove that they have suffi cient capital. These costs are not easily passed along to insurance customers, especially in an environment of soft pricing and low returns on invested assets. Smaller companies will need to find economic solutions that may involve selling portfolios or books of business, or mergers and acquisitions. This is where we find it may benefit companies like Ironshore, that have adequate capital, to take advantage of these opportunities.
The Solvency II process has also been an opportunity for companies to take a fresh look at their enterprise risk management practices and to strengthen them where appropriate to the business.
Do you see similar regulation emanating from the US?
There are a number of initiatives underway in the US on the regulatory front that will result in enhanced regulation so that they keep pace with the rest of the world, although due to the fragmented nature of the regulatory environment, the changes will likely be slower to develop.
Charles Dupplin
Chief executive officer, Hiscox Bermuda
How important is it for Bermuda to be included in the first wave of Solvency II equivalence testing, and why?
It is important both from an insuring entity point of view and from a holding company point of view. Operating companies worry that not being based in a Solvency II-equivalent jurisdiction could lead to some sort of commercial handicap preventing the free fl ow of business from an old and loyal client base in Europe. Holding companies fear the awful burden of twice as much regulatory interaction for their groups and all the associated cost, and wear and tear on management. I suppose there is a third concern, which is that in the far longer term, the Bermuda market’s reputation would suffer, making the attraction of new market participants more diffi cult and potentially leading to full or partial departures.
What have you learned from the process of getting ready for Solvency II?
What a good regulatory environment Bermuda already has, compared to many continental European countries and at an absolute level. In the mixture of changes for our 100-year-old group, there are some we feel are not so necessary, but equally, we will emerge a better business in other ways. And boy, it is costly.
Having gone through the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
The problem has been more that Solvency II is not a defined thing and will probably end up meaning something slightly different in different jurisdictions, as different regulators interpret and enforce things in different ways. Until the end of the process, one will not know how big a problem this is, or whether it will result in some jurisdiction shopping. The opportunity for fully compliant and capitalised groups will be at the expense of those who come up short.
We have a wide experience of continental European regulators and naturally of the Financial Services Authority (FSA). The third nonlife directive has been somewhat differently interpreted and enforced, and I feel that history may well repeat. I am confi dent that there are insurers who are Solvency II-short, but I am less confi dent that, politically, any larger institutions would not somehow be afforded a period of grace.
Do you see similar regulation emanating from the US?
No. If you think that it is hard getting 27 Europeans to agree, try getting 51 Americans. I cannot see the driver to get a common regime. I could see some go-it-alone work by individual states.
Carl Groth
Chief risk officer, Torus Insurance
How important is it for Bermuda to be included in the first wave of Solvency II equivalence testing, and why?
For us, it’s important because we would like the various regulatory regimes that Torus faces to be as aligned as possible in terms of solvency-based requirements. If Bermuda were included in the first wave, I would expect any subsequent solvency regime that comes out of Bermuda to be in alignment with Solvency II, so companies wouldn’t have to do anything substantially different. We would like to keep practices the same as our Solvency II-regulated entities—which are our UK and Lloyd’s Syndicate entities and Europe.
What have you learned from the process of getting ready for Solvency II?
"I don't see a world where the US doesn't have a similar type of regulation, because there can't be an imbalance between US companies and the rest of the world. There are a fair few US companies that have Bermuda and European operations, so those companies will have to be-- at least for those operations-- Solvency II-compliant."
It’s important to understand that much of what we’re already doing is what we would have to do for Solvency II, in order to implement good risk management practices throughout the Torus group. The process has forced us to prioritise things in a way that corresponds to the timing of Solvency II—particularly the timing of what the FSA is requiring. Because Torus is a relatively new organisation, we’re building things for the fi rst time and, in many respects, the timing of Solvency II is pushing us to address things for the fi rst time. We’ve learned some things around that, such as the requirements around building reverse stress testing—which have caused us to address certain things that we might not have done so early on—so there are certain aspects (with the stress testing) that are showing us some things that are particularly valuable in our early years of management.
Having gone through the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
This gets back to my earlier statement that Torus isn’t doing anything differently because of Solvency II that it wouldn’t normally do. We certainly don’t view Solvency II as a problem for us. From my personal standpoint, I think that it is a great opportunity to help drive the creation of risk management capabilities across the organisation, and from that standpoint, it’s been an opportunity for me to help set risk management priorities in all of the things that Torus is doing as a group—which helps us to grow our business. It’s pretty high up the totem pole in the list of priorities, so it’s been an opportunity for me.
Do you see similar regulation emanating from the US?
That’s a good question. Ultimately, it’s going to happen. I don’t see a world where the US doesn’t have a similar type of regulation, because there can’t be an imbalance between US companies and the rest of the world. There are a fair few US companies that have Bermuda and European operations, so those companies will have to be—at least for those operations—Solvency II-compliant. There can’t be an imbalance. A prime example is when the rating agencies look at companies— particularly in the cases of Standard & Poor’s and A.M. Best, we know that they hand out ratings to companies that are purely US-based and are not subject to Solvency II or the Bermuda regulations. Ultimately, their risk management practices will be somewhat less capable than the companies that are Solvency II-compliant. I do think that the National Association of Insurance Commissioners and the insurance regulators in the US will have to do something, but the question is when. It is much more diffi cult for the US system to develop a Solvency II-like concept, because they have so many regulators that are going to have to come together and agree on that.
Peter Hearn
Chief executive officer, Willis Re
How important is it for Bermuda to be included in the fi rst wave of Solvency II equivalence testing, and why?
It is very important that Bermuda be included in the fi rst wave of Solvency II equivalence testing. Equivalence will provide many benefi ts to Bermudian companies, creating a level playing fi eld. It will ensure that Bermuda-based reinsurers will be treated equivalently to European-based reinsurers for European-sourced business. It will also allow Bermudian subsidiaries of European groups to use BMA capital rules, rather than Solvency II calculations that may not suit their business mix. Finally, equivalence will allow the BMA to act as a group supervisor for those Bermudian companies with European subsidiaries, removing the need to restructure to avoid double regulation.
What have you learned from the preparation process of getting ready for Solvency II?
As a broker, we are in the fortunate position of observing and advising, rather than being affected directly. Solvency II is a complicated beast, with considerable organisational impacts. But we do see Solvency II as offering opportunities for companies to improve their governance and operational effi ciency, particularly around the transparency of decision-making. It is certainly better to start the Solvency II process early, as so much of Solvency II is not just what you do, but how you do it and how it is integrated into every level of your business. Only then will regulators be truly satisfi ed and the company will also gain the real business benefi ts: a win-win.
Having seen the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
As discussed above, it is both. There will be organisational diffi culties, shortages of qualified staff and a fair amount of pain on the way—not just for insurers, but also for the local regulators. There will also be additional costs, particularly if, as we expect, most larger insurers move towards full or partial internal capital models as quickly as their regulator allows. But we also believe that, if properly implemented, there can be great benefi ts. The trick will be not to let the bureaucracy strangle the business, but rather to embed good, appropriate practice within the company to improve effi ciency as well as to guarantee compliance.
Do you see similar regulation emanating from the US?
It seems inevitable that similar regulation will spread globally. Some national regulators have already adopted similar regimes; others are watching and waiting; while a few are shadowing Solvency II. Rating agencies are also moving in a similar direction. There are difficulties, given the fragmented nature of US regulation. For example, the US was not considered by the Committee of European Insurance and Occupational Pension Supervisors (the pan-European regulatory body) as a candidate for the first wave of Solvency II regulatory equivalence, but the importance of the US as a market and business partner was clearly noted; a solution will be found.
Stuart MacKellar
Managing director, Amlin Bermuda
How important is it for Bermuda to be included in the fi rst wave of Solvency II equivalence testing, and why?
"There is a significant lead time for firms to mobilise fully for Solvency II. It takes time to understand in full all the requirements and to form a vision as to what the firm's response to Solvency II will look like. There are no 'off-the-shelf' solutions."
Bermuda plays an important role in the global re/insurance marketplace and it is a positive message that Bermuda has been identifi ed as a possible priority for the fi rst wave of equivalence testing. The BMA has worked hard to ensure that its regulatory system is aligned to the risk-based principles that are being developed in other jurisdictions. It sends a clear signal that Bermuda is a professional and mature insurance hub. As far as Bermuda companies are concerned, the importance of the wider issue of equivalence depends in part on whether the fi rm is, or forms part of, a Bermuda-based group or not. Large insurance groups will have differing views, depending on their domicile and group structure.
What have you learned from the process of getting ready for Solvency II?
Not to underestimate the effort involved! There is a signifi cant lead time for fi rms to mobilise fully for Solvency II. It takes time to understand in full all the requirements and to form a vision as to what the fi rm’s response to Solvency II will look like. There are no ‘off-the-shelf’ solutions. Solvency II affects the whole organisation and you need to bring people with you on the journey. We have found that communication at all levels of the company, along with strong management buy-in, have been critical to the success of our programme to date.
Having gone through the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
We decided at an early stage to see Solvency II as an opportunity and to fully embrace its objectives. Indeed, we were already working on developing our risk and capital management capability, and Solvency II was not seen as a change in direction. Of course, Solvency II has required signifi cant business resources, but we see this as an investment for which there will be a quick payback. There was clearly a misconception by some fi rms in the early days as to what Solvency II was really about. Those firms that see Solvency II as a purely compliance exercise will strangely fi nd it more of a challenge to be fully compliant. In its final state, Solvency II affects culture and business practice, and fi rms that have not accepted the underlying principles will fi nd it diffi cult to drive through the changes and evidence them to a suffi cient degree to the regulator. We believe that we are beginning to yield business benefits from Solvency II—for example, improved awareness of the risk relativities across different classes and opportunities to improve the effectiveness of our reinsurance purchasing.
Do you see similar regulation emanating from the US?
Not in the short term, but in due course, it is likely that the US states will begin to adopt a more risk-based approach to regulation. The US authorities are likely to keep a watching brief on the progress of Solvency II implementation, but the lack of a central regulator will prove an obstacle to change. This is not to say that US fi rms will not adopt practices being promoted by Solvency II. Many already are. Indeed, the rating agencies are strongly advocating the use of enterprise risk management techniques and these complement the objectives of Solvency II regulation. Convergence of international accounting standards with Solvency II may act as a catalyst for regulatory change in non-EU jurisdictions.
James Mounty
Head of structured reinsurance, Miller Insurance
How important is it for Bermuda to be included in the fi rst wave of Solvency II equivalence testing, and why?
The Solvency II framework imposes a lot of questions on those subjected to its requirements and many of those questions will affect reinsurance counterparties in Bermuda. In my opinion, Solvency II is a good thing for the regulation of the industry as a whole. It provides a very detailed framework that can really help carriers assess the risks they face and is likely to result in an increase in the capital required to support underwriting activity. Without question, it is correct that as one of the global centres for reinsurance, Bermuda should adopt equivalence.
What have you learned from the preparation process of getting ready for Solvency II?
The regulatory framework is very detailed and extremely complicated. Just reading through the documentation takes a huge amount of time. Many of our clients have considered the internal model approach, but the more you look at the requirements, the more you realise what a big job it is to implement everything in time for 2013.
As a reinsurance broker, we can offer considerable assistance with the value-at-risk approach to modelling, and provide innovative structures to assist our clients in reducing the amount of capital they need to hold.
Having seen the process so far, do you view Solvency II as a problem or an opportunity? Please explain why you feel this way, if possible based on examples from your own company’s experience.
Solvency II represents a signifi cant opportunity for Miller. Generally speaking, the regulations will require insurers to hold more capital. Reinsurance is increasingly viewed as a capital substitute, particularly since the financial crisis has restricted the availability and fl exibility of other instruments (debt/equity/hybrid).
"There was clearly a misconception by some firms in the early days as to what Solvency II was really about. Those firms that see Solvency II as a purely compliance exercise will strangely find it more of a challenge to be fully compliant."
Many of our smaller insurance company clients are leaning on us to provide independent actuarial advice on value-at-risk modelling. Clients also seem to like our ideas on reinsurance structures optimised to reduce the capital required under Solvency II. An example: We had one affinity group client that offered a £10 million limit on each and every loss to its members. Historically, it had bought reinsurance to cover larger losses, but its experience was such that it rarely used the programme. Since most of the losses the company sustained were within its retention, when it did its risk modelling to assess its solvency capital requirement, the reinsurance offered it very little capital relief.
Although the company had been very profi table over time, it didn’t have a particularly strong balance sheet and found that it needed to increase capital under the new regime. We helped implement a multiyear stop-loss contract that allowed the group to reduce its solvency capital by about 90 percent.
Do you see similar regulation emanating from the US?
The US doesn’t treat insurers the same way from state to state, so they have a long way to go in harmonising their regulatory framework. We hope that Solvency II might trigger a review of the current approach. The US system is so complicated that a drastic overall review would be a good thing for insurers and policyholders alike. We would certainly support a change in the current system, but feel this is a long way off.
