Lloyd’s: A Delayed Solvency II Would Be a Distraction for Insurers

Lloyd's is uneasy about talk of a possible one-year delay, to Jan. 1, 2014, in the implementation of Solvency II.

"That's not something we would welcome," said Luke Savage, director, finance risk management and operations at Lloyd's, about a possible delay. "We've been working hard for a number of years now to get ourselves ready. We think we will be ready for the first of January 2013. And we don't really see there should be any reason to delay."

Solvency II is a European Union directive designed to create a uniform capital adequacy structure for insurers and reinsurers throughout the 27-member European Union.

Signals pointing to a possible deferral have come from within both the EU's Council of Ministers and the European Insurance and Occupational Pensions Authority [EIOPA]. The Council of Ministers performs a political role, while EIOPA is part of the EU financial services supervisory structure.

The sooner the Solvency II structure is in place, Savage said, the sooner Lloyd's can get back to its focus on writing insurance. He said he would like to see regulation removed from its current leading place as a concern of insurance CEOs around the world.

"Arguably the clock's just been put on pause for a while" on Solvency II, said Savage, who expressed the hope that a delay would not slow down Lloyd's preparations. "We've got good momentum behind the project," he said.

Savage, who spoke during an interview at a London press briefing, said a deferral of another year could cause people "to stretch things out," spending more time and money on it, without getting more value.

"An overwhelming majority of our market players want us to just stick to the current timetable," Savage said.

Sean McGovern, Lloyd's director for North America and general counsel, said in the press briefing that Solvency II has been in preparation for more than a decade.

"It is a harmonized EU-wide regime," McGovern said, listing its goals as "better regulation, deeper integration of the EU markets, enhanced policyholder protection and improved competitiveness.

McGovern said there are indications from the insurance industry that progress toward some of these goals has been hampered by the global financial crisis.

Lloyd's has welcomed the decision that under Solvency II it will be treated as a single entity for solvency purposes and that letters of credit will continue to count as capital, McGovern said. The first was recognition "that ultimately all policies at Lloyd's are backed by the same chain of security," McGovern said. "That was an important early win for us."

Throughout the preparation process, Lloyd's has argued that Solvency II should not create undue burdens in terms of costs or regulation on Lloyd's or on the wider insurance market in the EU.

In addition to a possible one-year delay on Solvency II, Savage said, there is also talk of "potential transitional measures which would then phase in certain components of Solvency II over a longer time period." These periods could range as long as 10 years, he said.

Lloyd's is spending almost 15 million pounds ($24 million) a year on Solvency II, for a likely total of almost 50 million pounds. The combined spending by the 52 Lloyd's managing agents brings the grand total to "at least" 250 million pounds, Savage said.

Lloyd's will benefit by being able to use its approved model under Solvency II, Savage agreed. This means the market will not have to rely on the much higher capital figure in the standard formula.

Savage looks for improvements under Solvency II in risk management, a better sense of risk appetites within the market and a clearer understanding of how businesses are run.

Lloyd's has been successful in arguing on the European level that its particular nature should be recognized, Savage said. "Lloyd's as a market is seen on a par with a unitary insurer," he said.

Lloyd’s has a current Best’s Financial Strength Rating of A (Excellent).

To hear the full interview with Luke Savage go to http://www.ambest.com/media/media.asp?RC=189401

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)