Currently only three European countries, including Bermuda, are classed as Solvency II (S2) equivalent, while negotiations between the European Union (EU) and US are in progress, according to Aon Benfield’s latest Reinsurance Market Outlook report.
The study shows that the introduction of Solvency II has had a number of potentially important impacts on reinsurance supply and demand across the EU.
“Currently only Bermuda, Japan and Switzerland are deemed equivalent,” the report said.
According to the report Solvency II has been a catalyst for improved risk management across the EU re/insurance industry, driven by the requirement for all firms to conduct an ORSA. The mark-to-market nature of the regime has increased the volatility of capital positions.
The report said that EU firms underwriting capital-intensive products will increasingly use hedging strategies to mitigate their exposures. High levels of uncertainty within legacy reserves drive higher regulatory capital requirements.
It stated: “After a long time in development, the introduction of the new solvency regime has proceeded relatively smoothly, albeit with the aid of certain ‘transitional measures’, designed mainly to help life insurers address the challenges of the low interest rate environment.
“The change was easiest for larger, more sophisticated re/insurers that were already managing their businesses in accordance with Solvency II principles and with regard to the significantly higher capital thresholds required by the rating agencies.
“Many have achieved internal model approval, allowing them to benefit from diversification benefits in their SCR calculations. Smaller companies have found converting to the new regime more difficult. The pressure is greatest on unrated mutuals, mono-line insurers and captives that lack diversification and do not have easy access to new funds."
Aon Benfield, Solvency II, Bermuda, Europe, North America, Insurance, Reinsurance, Risk management, European Union, Reinsurance Market Outlook