The true importance of Bermuda securing Solvency II equivalence might not become completely apparent for several years, but in the long term it will be significant. Mike Van Slooten at Aon Benfield tells Bermuda:Re+ILS.
The importance of Bermuda’s securing equivalency with Solvency II will become increasingly apparent over time as the true implications of the regulations and the way they are applied in the real world are revealed, believes Mike Van Slooten, co-head of Market Analysis at Aon Benfield.
Van Slooten believes that an element of ‘Solvency II fatigue’ has beset the industry, given how long it has taken to bring the regulation into effect. But its true consequences for the industry and for individual companies will become clear in the months and years ahead now.
“The consequences of Solvency II for everyone—and its importance to Bermuda—will become increasingly obvious over time. It almost feels that there was such a long build-up to its coming in that people stopped asking questions about it in the end, which is strange. It feels like a lull at the moment but I believe that will quickly change.”
He adds that while Solvency II has not made headline news as much as might have been expected, it would have been a big issue for Bermuda had it failed to secure equivalence.
“It would have been a major issue if they had not got it. It was an important achievement for Bermuda,” he says.
Van Slooten makes the point that the way capital charges will apply, for example, and the consequences of the new capital regime more generally will become truly apparent only over time. Reinsurance recoverables, for example, held with companies outside a Solvency II-compliant regime will attract a higher capital charge than those with companies in countries covered by Solvency II, or which have equivalent status.
“There has not been a huge impact at the moment and we are not seeing much of a change in the behaviour of buyers but that may change if they start to build up recoverables from companies outside Solvency II,” he says. “If there is a big cat loss, for example, the consequences of this will start to emerge.
“We spend a lot of time speaking to reinsurance buyers and they are constantly weighing up the pros and cons of different domiciles. As far as Solvency II is concerned, there is no issue with reinsurers based in the EU, or in other territories deemed to have equivalent regulatory regimes, notably Bermuda, Switzerland and Japan.
“However there are some big reinsurers based in domiciles that have not achieved this status, including China, South Korea, India and the US. Negotiations are currently underway between the EU and US regulators and these are perhaps more important than people realise.
“The point is that, going forward, European buyers will be focusing more closely on the domicile of their reinsurers and what the implications might be in terms of future capital charges.”
Van Slooten does express an element of surprise that, in spite of the long gestation period of Solvency II, the EU and the US are only now starting talks that may result in some sort of recognition of each other’s regimes.
“Who knows how long those talks will take,” he says.
The long-term view
While it might seem surprising, given the sophistication of reinsurance buyers these days and the resources at their disposal, that few seem to have adjusted their strategy in light of the implementation of Solvency II and its potential consequences, Van Slooten stresses the relationship-driven nature of reinsurance as a business.
“There is a lot to think about. Now that the first results have been published, buyers are asking what Solvency II capital ratios really mean and to what extent they can be relied upon."
“First, there is a lot of depth to Solvency II and certain things will become apparent only over time,” he says. “You also have to remember that reinsurance is a relationship business. People need a good reason to change the relationships they have had for a long time. While there might be some arbitrage on capital charges, a loss or delayed payment would cost them a lot more.”
There are other reasons that securing Solvency II equivalence is important for Bermuda. Van Slooten argues that it gives the domicile even more legitimacy at an important time, on several fronts.
He notes that Bermuda has been under attack from certain political factions within the US of late. The Internal Revenue Service has also been looking very closely at hedge funds.
“Such investigations and the subsequent press creates uncertainty,” he says. “Securing Solvency II equivalence is a great endorsement of Bermuda’s regulatory regime and its long-term importance to risk transfer globally.
“It carries a lot of weight. Bermuda is one of just a handful of jurisdictions globally which have achieved this. It was a lot of work but it should bring big competitive advantages in the long term. Capital moves very quickly these days and this places Bermuda in a good position to capitalise.”
A question of reputation
Bearing all this in mind, it is no coincidence that the Island has become more attractive as a domicile. XL Catlin recently announced it was re-domiciling from Dublin, while Qatar Insurance Company selected Bermuda as the home of its reinsurance operations last year. Other carriers including Hiscox have also extolled the virtues of Bermuda in recent months.
“The commentary has been very positive of late and there is no doubt that securing Solvency II equivalence has a part to play in that,” Van Slooten says. “It has reduced any perceived uncertainty around Bermuda’s future as a risk transfer hub and it is benefiting as a result.”
He notes that it also protects and legitimises Bermuda’s growing market for insurance-linked securities (ILS).
Van Slooten stresses that there remains some way to go in terms of the market truly understanding Solvency II, and the ability of reinsurers and buyers to adjust to its consequences.
Some players have had internal models either partially or fully signed off, for example, often at great cost. The extent to which this will give them an advantage remains to be seen, although the bigger players should benefit more. “For very big and diverse companies it is probably worth the investment,” he says.
He also stresses that differences are already emerging, first in the transparency of different regulators in the way they approve internal capital models and some interpretations of how elements of Solvency II should be applied.
“Solvency II was meant to represent a harmonisation of regulation across the EU, so that apples could be compared with apples, but it is clear that there is a still a lot of work to be done,” he says.
“It would be nice to see a true comparison of solvency ratios, but in truth there is variability in the way models work and regulators are interpreting the rules in different ways. We expect things to improve over time, though.
“There is a lot to think about. Now that the first results have been published, buyers are asking what Solvency II capital ratios really mean and to what extent they can be relied upon. These questions are inevitable, as the new regime represents a very major change from what went before.”
Mike Van Slooten is co-head of Market Analysis at Aon Benfield. He can be contacted at: firstname.lastname@example.org
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