Ninety-two per cent of members of the Association of Financial Mutuals (AFM) who responded to a survey in July / August 2011 indicated they were confident or very confident that they will be fully compliant with Solvency II requirements by 1 January 2013.
That seems a very strong statement of intent, particularly as detailed requirements are still awaited in some aspects of the Directive.
In marked contrast though, only a third of those surveyed were confident that the sector as a whole would be ready by 1 January 2013. This is partly explained though by lack of information: a half of respondents indicated they were still waiting to make up their mind about the state of readiness of other mutuals. A recent survey by Deloittes* across a broader cross-section of UK insurers by comparison suggested almost two-thirds believed the industry as a whole was on course to achieve compliance at this time. As the Deloittes survey had a bigger proportion of large companies involved, this may indicate that smaller companies are deemed at greater risk of missing an early deadline.
This suggests that there is some urgency in the mutual sector to see regulators unveil the final details of the new regime, so that implementation plans can proceed effectively. In discussion many of our members have said that they would still like to be given the option to comply with Solvency II from January 2013, and that after all the recent prevarication, the European Parliament concludes there should be a delay, this will not be universally welcomed.
When asked which areas of the implementation plan cause greatest concern, regulatory clarity was the most significant dimension, following by the costs of complying. This was reinforced by views on what role AFM can best play in helping members implement Solvency II: working with regulators to achieve greater proportionality, and hosting meetings and seminars to encourage the sharing of good practice were most popular options. Our next seminar on Solvency II is scheduled for 11 October, and is proving very popular with members.
There is a real concern that the Financial Services Authority will try to gold-plate the standard formula approach, by seeking to add bespoke requirements and to load capital in some areas in which they are uncomfortable. This seems very inconsistent with the concept of a standardised approach, and suggests a back-door route to employing internal models, where the size or complexity of the firm does not warrant it. As a result, firms may be forced to hold more capital, thereby reducing efficiency, and creating a competitive disadvantage against those insurers with an internal model, or from other European countries or further afield.
This all reinforces that there is a real need for regulators to explore ways in which the regulations can be simplified where warranted, so that the same ends are achieved more cost-effectively in smaller insurers. Even more important, FSA and European regulations need to show greater leadership: there has been a subdued tone to messages issued by the regulator in recent months, both about the timeline for Solvency II and it's ultimately value. Our research shows that mutual insurers remain committed to embracing Solvency II- if not with enthusiasm, than at least with a pragmatic desire to deliver the project on plan. However this is at risk if regulators remain lacklustre in their own approach.
In other aspects of the survey, three-quarters of AFM members now have staff actively working on their Solvency II implementation plan, whilst most of the remainder have completed their gap analysis and developed a resource plan- with detailed implementation waiting for regulatory certainty. Eight per cent though indicated they have still to develop a detailed plan.
In relation to the work being undertaken, the areas that mutuals are currently most focused on are risk governance systems, as well as embedding and use. The same Deloitte's survey suggested that implementation planning, as well as personal incentivisation and rewards, were the key priority at present; but for mutuals the review of incentive arrangements seemed to be of least concern.
Over half of AFM members see Solvency II as a strategic enabler, though only one firm describes it as the firm's overriding strategic initiative. Firms that regard Solvency II as less of a regulatory imperative are generally less confident that they are on plan to meet a deadline of January 2013. Within these views is the very real concern that the resources need to deliver the Solvency II work are also competing for resource with a host of other regulatory change. This includes the launch of the Retail Distribution Review, change to the tax and accounting regimes, the launch of new regulations, gender equalisation, with-profits regime change and a host of other European and UK initiatives. Regulators have shown scant awareness of the breadth of change affecting the insurance industry, and not done enough to co-ordinate or mitigate the impact of change.
One revealing aspect of the survey is that on the whole, there is quite limited concern amongst UK mutuals as to their capital position post-Solvency II. This reflects that the current capital regime in the UK is robust already, and that experience of quantitative surveys is that capital requirements will only change marginally under the new regime. It is also a reflection of the relative financial strength of UK mutuals: a report in this month's Money Management magazine indicated that the top eight life companies, based on free asset ratios, are all mutuals.
Martin Shaw, Chief Executive of the Association of Financial Mutuals stated:
"This survey demonstrates just how seriously UK mutuals are committed to ensuring they comply fully with Solvency II, and how committed most of them still are to implementing the new regime on 1 January 2013. However, that is jeopardised by a failure by European regulators to agree on the finer detail of the regime, and to identify ways in which the rules can be properly simplified for smaller organisations. We are committed to working with the FSA to ensure a smooth transition to the new regime."
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