Solvency II went live earlier this year after 10 years of preparation and over £3bn in UK insurance investment. The deadline to implement Solvency II across the EU was January 1st 2016 and the objectives of this legislative change were to improve consumer protection, modernise supervision, deepen EU market integration and increase the competitiveness of EU insurers.
Although it's too early to tell whether this legislative change has had the intended impact, we spoke to more than 40 insurance experts to gauge their reaction to the implementation of Solvency II so far and what effects it was having on the insurance industry as a whole.
We asked experts about five areas relating to Solvency II:
- Data Security
- Changes To Reinsurance Protection
- The Impact Across Europe
1. Data Security
Solvency II is generating large amounts of new complex data, and in light of well publicised cyber attacks information security is a top priority for many insurance firms in 2016. Some of the recent recruitment efforts we've seen in the Insurance space have involved the acquisition of experts in Big Data and Cyber Security, and and insurance firms have had to modernise systems and processes in preparation for Solvency II.
We asked experts on a scale of 1-10 how secure they think this new data is, and given the attention data security has been receiving we were surprised that only one person rated data security at their firm above 8 out of 10, with the weighted average across all respondents coming out at 6.5 out of 10.
This would imply that more work needs to be done to improve data security, particularly as one of the objectives of Solvency II is to increase consumer protection and confidence.
To understand how fully Solvency II has been implemented so far, we asked our experts how their company is planning on reporting this year. Around 62% of respondents said that their business was planning on using a mixture of both old standards and Solvency II, while 21% said their business had fully made the switch to Solvency II.
Judging from our survey response, it seems that many businesses are "holding fire" until the regulations will be enforced for reporting on 2015 results. This is an interesting strategy, suggesting that more work will need to be done behind the scenes at these businesses to ensure they are fully compliant. A risky strategy as time is running out.
Our experts didn’t have a huge amount of faith in the effectiveness of this new reporting structure with the average with 67% of respondents rating it’s effectiveness at 6 out of 10 or below.
Most of our survey respondents live and work in the UK, so given the varying standards of reporting that existed within the EU under the old system it will be interesting to see how the perceived effectiveness of these new reports varies among the member states.
3. Changes To Reinsurance Protection
Both traditional risk and financial reinsurance appetite will be affected by Solvency II. Of the experts we asked, almost 80% said that they were re-evaluating their reinsurance protection, with the protection primarily being used to mitigate risk rather than purely focussed around reducing capital requirements – something that the PRA recently warned against.
It took time to be ready for Solvency II but, during that time, insurers experimented with Solvency II models to come out with optimal reinsurance strategies. Pedro Ecija, an independent Actuarial and Data Analytics Consultant remarked “ Transition to new reinsurance plans takes time, often years and we are now seeing entities at different stages of that transition.”
We asked our experts whether as a result of the re-evaluation of reinsurance protection we would see more reinsurance start ups as a result, and more than 50% didn’t think there would.
The general opinion was that reinsurance only works if reinsurers can diversify risk which would be very difficult for a start-up, and the ability for a start up to secure the capital necessary to be viewed as a secure business would also likely be a challenge.
That said any changes in legislation can present opportunities for entrepreneurial thinking, and 15% of respondents thought that this could indeed lead to an increase in the number of reinsurance start-ups.
When recruiting across European markets, it quickly becomes apparent how much business lines vary. EIOPA is actively trying to encourage convergence, but recruiting individuals with the right skill-set may well be a struggle.
This will lead to an increased demand for actuarial talent on both a permanent and interim basis, moving more towards permanent as Solvency II becomes a BAU activity. Almost 80% of the experts we asked saw an increased need for actuarial and risk professionals in order to be Solvency II compliant.
Companies may need an in-house actuary in the long term, secondments and contractors are the obvious short term solution, but will come at a premium.
Olive Gaughan remarked “ In the short term there may be a struggle to source suitably experienced and qualified staff to access the suitability of complex models and analyse the information received.”
5. Impact Across Europe
Solvency II is a bold directive with the aim of deepening EU market Integration. The majority of our experts however felt that this “one size fits all” concept is in fact flawed and that it’s not possible for a single standardised approach to compliance across Europe.
Some experts felt that in reality though there will always be a difference with the way Solvency II is enforced across Europe with some commenting that it’s more “relaxed” in certain countries and that the focus will change to look at internal model applications among other countries – particularly France and Switzerland.
Given the diversity of Pan European insurance markets, most experts felt that non UK regulatory authorities will struggle with the increased work load, leading to an increased reliance on secondments and contractors.
There is an on-going concern around educating boards and Non-Executive Directors on Solvency II in order to ensure compliance. This is something that should have already happened, although training forums, workshops and regular presentations will become the norm. Full understanding of Solvency II is essential at this level and it should not be seen as a “ticking the box” exercise although there was wide acknowledgement that in practice this is difficult.
The jury is still out on the full impact and implications of Solvency II and as the year progresses we should get more clarity among some of the issues and concerns raised by the experts we spoke to. It’s clear that full implementation of Solvency II is still some way off and we anticipate high demand for suitably experienced and qualified staff over the next couple of years.
If you’ve not read it already, download my Talent Hiring Checklist for recruiting within Insurance and Financial Services to learn how you can de-risk your hiring process and secure the high demand individuals you need for Solvency II and other initiatives.