Protectionism thriving as Solvency II falters...

Are EU solvency plans in tatters?...

Does the news over the weekend that European politicians have yet again failed to to reach agreement on the finer points of Solvency II really come as a surprise to anyone? Why is there disagreement? Simple. Some EU countries, such as Italy and France, want to make changes that would benefit financial products in their own home insurance markets. 

These last minute alterations to a process that has taken ten years to craft, at a significant cost to the European insurance industry in terms of time and money in developing new business and technology models to meet the expected regulatory requirements, is nothing but protectionism under another name.

In a previous Blog we had suggested that the brand of 'flexibility' previously being considered by the European Commission e.g. in 

allowing a phased-in period for historic life insurance products, brought 

into question the motivation behind this particular brand of 'flexibility' and that it may have more to do with a protectionism. The direction in which Solvency II is now heading does nothing to alleviate our suspicions.

While we have always supported the principle of a risk-based capital (RBC) regime for Europe's insurance industry, we have never understood why European Regulators decided, in the first instance, to reinvent the 'solvency' wheel when there are a number of other (successful) RBC working models already in existence e.g. in the US that could have easily been adopted for use in Europe. This 'global' approach could even have headed-off the much debated equivalency issues and facilitated European and US insurers operating on a similar regulatory platform. Surely such an 'joined-up' approach would have gone a long way to addressing a global regulatory structure for what is, and always will be, a global industry.

Regardless of how and why we've reached this point of indecision, the main problem 

with Solvency II is not the concept or its (overly) ambitious objectives but simply one of timing. It has taken far too long to implement and like an overdue IPO, events (in particular the global credit crisis) have resulted in it now being impossible for Europe's Regulators to ever achieve their solvency restructuring plans to link capital requirements to underlying risk rather than insurance premium (or claim) volumes.

Has a golden opportunity has been lost? It would seem to be the case as 

Solvency II, if it is ever going to be implemented, will be nothing like the original concept and will end up being a 'watered-down' solution that has more to do with political expediency than commercial reality? Shame on those that have allowed this to happen.