New Zealand has one of the least regulated insurance frameworks in the world. The spin we hear is that : “The regulatory environment that we enjoy in New Zealand is successful because the insurance industry has been proactive in developing its own self-regulatory framework”. Well the Christchurch earthquakes and the failure of AMI, Western Pacific and Ansvar would indicate that their self-regulatory framework is somewhat wanting.
Meanwhile the rest of the world was rapidly moving toward a more highly regulated insurance framework- Solvency II. The Solvency II requirements are said to represent what is likely to be the biggest change in insurance regulation of a lifetime. Solvency II was to provide the framework for the management and capitalisation of all insurance in the European Union from 2013. However, the latest news is that Solvency II has sustained yet another delay- implementation is now said to be 2016. “Insurers have been working hard on their preparations for a long time, and when Solvency II eventually goes live it will have been well over 10 years since it was given the green light. This has cost the industry millions of pounds, ultimately increasing customer premiums and consuming tax revenues. The main concern is that there is still a great deal of uncertainty over the exact rules that will be implemented.” (http://solvencyiiwire.com/a-path-to-better-policyholder-protection-sponsors-feature/64678).
Had Solvency II been implemented it would have had an effect on any insurance that touches European Union risks. It was likely to form the basis of future regulation on a global scale. It was said to impact most forms of risk financing in the future. Insurers had been preparing and spending money on new personnel, processes and technology for the implementation of Solvency II. It requires insurers to adopt risk based capital allocation models for their business. In addition it ensures that senior management is explicit about the management principles and appetite for risk and they must transparently assess the capital required to carry those risks. The results of the last round of impact studies have been published and they identify some immediate challenges while suggesting their possible effects. The conclusions suggest that many insurers will require more capital to run their business; 360 of the 2,520 insurers tested (14 per cent) revealed financial strain as a result of using Solvency II tests – and a third of these would have had their licences withdrawn. However large insurance groups have a significant advantage under these new tests as their ability to diversify risk across the group means they need only 80 per cent of the capital they would otherwise have required.
The new tests will favour insurers with provable data who devote considerable resources to constructing their own models, or if not, full internal models Undertaking Specific Parameters. Solvency II was said to deliver a significantly enhanced regime for insurers which would provide greater policyholder protection. But alas, yet again, the policyholder misses out and instead, the status quo remains….