Solvency II news: 25 March 2011

CER and the budget; Solvency II and asset reallocation,  captive insurance in Guernsey, stress test news

CER and the budget

The Government is likely to keep tax relief on Claims Equalisation Reserves (CER) under Solvency II but the situation remains foggy. Howard Jones, head of financial services tax at Mazars, told Post Magazine: “Overall the announcement leaves more questions open than it answers, as it is still not clear whether any continuing system would only replicate what currently exists or include any major changes such as additions to the lines of business currently included.” Budget text on CER (p58): 2.94 General insurance Claims Equalisation Reserves (CERs) – “The Government will look to industry to give a robust justification for continuing the CERs tax relief. Dependent on this, the Government intends to legislate to retain the tax relief. The case for CERs will be reviewed again in the light of future insurance accounting developments currently expected in 2014 (Finance Bill 2012)”.

Solvency II could lead to asset reallocation

Professional Pensions magazine published an article discussing the likelihood of insurers moving assets out of long-dated debt (such as corporate bonds and gilts) to comply with Solvency II capital requirements. LCP partner, Charlie Finch, believes specialist pension insurers may shift out of long dated bonds into property, private equity and commodities, assets that are less correlated with corporate bonds. Solvency II capital requirements could also trigger a shift into sectors that provide a “natural hedge against increasing longevity”. However, the ten year transition provision on implementing the directive could mitigate the move out of long-dated debt, as it exceeds the duration of many corporate bonds.

Guernsey stays out of Solvency II to increase captive market

Guernsey believes opting out of Solvency II equivalency will increase its share of the offshore captive insurance market, according to Commercial Risk Europe. “Solvency II has been designed to address issues mainly related to systemic and group risks within commercial insurance markets. These are risks not generally faced by Guernsey-based international insurance companies, where there are a large proportion of captives,” Peter Niven, Chief Executive of Guernsey Finance, told the magazine. A captive insurance company is an offshore vehicle within a corporate group, whose business is to insure some or all of the risks of the group. Guernsey was one of the first jurisdictions to introduce a risk based approach to regulation. Today it uses Own Solvency Capital Assessment (OSCA) regime based on the International Association of Insurance Supervisors (IAIS).

New insurance stress test: more complex but not as harsh

EIOPA published details of a second Europe-wide insurance stress test (23 March 2011). The test will look at three different stress scenarios: baseline, adverse and inflation scenario. Philippe Guijarro, partner at PWC told Post magazine that the new stress test was not as severe as the previous one, but having to comply with the as-yet finalised Solvency II directive adds complexity for insurers. Running the test so close to completion of QUIS 5 is also likely to put more pressure on insurers. The stress test framework and spreadsheet can be found on the EIOPA website.]]>