Well intended it may be, but the European Union’s Solvency II regulatory regime for insurers could reek havoc among small and medium-sized insurers, warns the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE).
“Although the new Solvency II regulatory regime is not intended to restructure the European insurance market it currently risks doing just that,” stressed AMICE president Asmo Kalpala.
AMICE has 120 direct and 1,800 indirect members, representing a third of Europe’s insurers and 20% of total premium income.
“If the principle of proportionality introduced by Solvency II does not work in practice, we are likely to see aggressive market consolidation. Disproportionate governance and reporting requirements pose real challenges for smaller insurers,” Kalpala said.
Explaining proportionality, legal firm Dewey & LeBoeuf notes that it is linked to the need to avoid excessive strain on small and medium-sized insurers. However, size is not the only relevant factor when the principle is considered. Solvency II links proportionality requirement to the nature, scale and complexity of risks inherent in the business.
Kalpala added that higher capital requirements under Solvency II will also hit mutual and co-operative insurers especially hard.
A major concern of AMICE is that it is more difficult for mutuals and co-operatives to raise capital than listed insurers. AMICE believes some small and medium insurers’ need for capital could force them to consolidate and give up one of their key business advantages: proximity to their customers. In more extreme cases some could be forced to demutualise or close their business.
As it finalises Solvency II requirements, AMICE is urging the European Commission to protect “much-needed diversity in the insurance sector.” AMICE warns that in addition to employment loss associated with mergers, loss of diversity has wider consequences.
Specifically, AMICE emphasises that the mutual and co-operative sector is an important driver of financial literacy and inclusion. Market consolidation, it stresses, will diminish the often innovative products offered by its members, lead to product uniformity and distance the insurance industry from its customers.