Member States Struggling to Comply with Risk Regulation

As companies begin to tackle Solvency II, Poland and other central European states are striving to vault into compliance, writes James Brewer, Journalist - Lloyd's List

SO FAR, discussion about the looming Solvency II has concentrated overwhelmingly on western Europe.

Now the first moves are being made to heighten the debate in the central and eastern European countries that also have to come to terms with the directive.

Critical change is ahead under Solvency II, which will see insurers switching from a rules-based approach to regulation, to one that is risk-based.

Having only recently joined the European Union, some countries have to apply the criteria to an insurance industry that is less mature than counterparts elsewhere, although rapidly developing.

A team from UK-based specialist non-life actuaries EMB is just back from Warsaw after meeting some 80 insurers keen to explore the implications of the directive.

The EMB experts flew in, at the invitation of the Polish Chamber of Insurance.

“There is a tremendous thirst for knowledge,” said EMB partner Dr Andrzej Czernuszewicz. “However, the Poles will be the first to admit they have a long way to go before they have got to grips with the issues of Solvency II. As in western Europe, it differs greatly from company to company but, overall, I would say there is a lot of catching up to do.”

Under Solvency II, companies are required to measure the risk inherent in their business and demonstrate that they have the capital to cover those risks.

Although it is not compulsory to do so, insurers are strongly encouraged to achieve this objective through the creation of their own financial models.

One insurer at the event lamented: “There are companies that are still struggling with the Solvency I regime. They simply do not have the capacity to conform with Solvency II”.

The problems are both technical and financial. Few, if any, firms have a process in place that will be compatible with the regulations, and the lack of technical expertise will be a major stumbling block.

According to Piotr Piorek, a senior analyst at the Polish Chamber of Insurance: “The prevailing opinion is that under the Solvency II regime, most companies will be undercapitalised, and I think that it is close to the truth”.

Although Solvency II is due to come into force in 2010, the current year is a crucial one in its development. Many firms across Europe are taking part in what are known as Quantitative Impact Studies, which effectively means they are road-testing many of the key proposals.

Mr Piorek said: “The Polish insurers that are taking part in the quantitative impact studies are not a concern; they will be ready. But there are very few of them. The rest are afraid, they do not know what will happen.”

Dr Czernuszewicz said, “There has been relatively little discussion about Solvency II in Poland and a lack of publicly available information. There are some very capable people out there and I am sure they will get there eventually. But it is going to be hard work.” 

This article appeared in Lloyd's List in June 2006