Timetric insurance analyst Jay Patel tells Life Insurance International how the Dutch financial regulator’s relatively rigid interpretation of the Solvency II framework is impacting life insurers in the Netherlands, who have considerable exposure to long-term liabilities.
Looking at the broad picture, Patel notes there are discrepancies in the application of Solvency II, which impedes cross-country comparison of Solvency ratios. However, there is a remedy of sorts.
The central bank in the Netherlands (DNB), which is responsible for insurance regulation, has decided to apply a fairly rigid interpretation of the Solvency II framework to the insurance market.
One significant implication of this decision is the inability of Dutch insurers to utilise transitional measures that had been made available by the European Insurance And Occupational Pensions Authority (EIOPA) to help insurers facilitate the move to a substantially different regulatory regime.
This is important for life insurers in the Netherlands, who have considerable exposure to long-term liabilities.
The move to a risk based system will increase the minimum amount of capital an insurer must hold in relation to these liabilities.
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Transitional measures allow insurers to deduct from their technical provisions under Solvency II so that they are closer to how they would be valued under Solvency I.
This means that insurers that use these measures are likely to have a higher solvency capital requirement (SCR), as the capital they hold will exceed the capital they are required to by a greater amount, compared to a situation where they cannot use the transitional measures.
The inability to use transitional measures mean Dutch insurers’ SCR is likely to be lower.
Another reason for the regulatory view taken by the DNB according to Daan Schmitz, policy advisor at the Dutch Insurance Association is that: "The Netherlands has known market valuation for several years… It would have been illogical for the Netherlands to take a step back at this point."
Regardless of the merit behind the Dutch approach to transitional measures, these discrepancies between the applications of Solvency II by different national competent authorities (NCAs) reduces the ability to use the SCR to compare the solvency of insurers across Europe.
By comparing the SCR of German insurers with Dutch insurers, one will be comparing insurers operating under a ‘pure’ Solvency II requirement with insurers operating under Solvency II with elements of Solvency I.
There is a remedy of sorts for this impediment to cross country comparison of solvency ratios.
Next year all European insurers will be required to report their SCR with, and without, transitional measures. On the subject of more granular reporting of SCR, Schmitz says: "Then it will be clear what the impact of transitional measures will be."
Delta Lloyd is an example of a Dutch insurer that has reportedly encountered trouble in preparation for Solvency II.
The company had grown its long-term life insurance business from 2008 onwards meaning that it was much more sensitive to the higher capital requirements of the incoming regulatory framework.
Hans van der Noordaa, the CEO of Delta Lloyd was reported by The Financial Times as arguing that the DNB’s ‘fully loaded’ interpretation of Solvency II meant that is one of the areas where there is ‘not a level playing field in Europe’.
Jay Patel is an insurance analyst specialising in regulation at Timetric’s Insurance Intelligence Center. He also writes on insurance regulatory topics for Life Insurance International.
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