For the insurance services sector, it is well known that Solvency II will come into force for European insurers on Jan 1, 2016. Its impact will change the way that all data used to calculate risk is collected. This means that more data will need to be sourced, processed, stored and distributed to management and regulators to higher levels of consistency, accuracy and quality.
Solvency II will be more relevant to U.S. insurers than they may realize in the near future. In fact, the Standard & Poors 500 Index is already using it as a model for “best practices.” These practices are already supplementing, rather than replacing, the existing guidance for the U.S. insurance industry. Further, it is becoming clear that the Dodd-Frank Act may also encourage these U.S. insurance companies to adopt and implement many aspects of Solvency II regulations prior to any sign of them in the U.S.
“Solvency II will be more relevant to U.S. insurers than they may realize in the near future.“
The potential for Solvency II in the U.S. has massive implications
Solvency II will be enacted in the E.U. to increase risk-based capital requirements and reduce insurer failure rates to near zero. Industry experts have speculated that U.S. firms will be affected by the Solvency II regulations for two main reasons. According to a report by KPMG, many U.K. insurers have an EU parent or subsidiary with a presence in the U.S., and/or Solvency II regulations will become the norm around the world. As a result, there is a panic among insurers, including those in the U.S., about the potential costs of Solvency II implementation.
The bottom line is that U.S. insurers should start implementation now
The concerns for U.S. insurers are very real, as the implications of Solvency II in the U.K are far from settled. It remains to be seen what the ripple effect of Solvency II implementation will have on U.S. insurance industry regulation directly, but what is known is that it has already started to make its presence felt.
One of the most important factors of Solvency II and its impact on U.S. insurers is that it could provide international companies with a competitive edge over U.S. insurance corporations. This is due to the fact that these companies in the EU will have near-zero levels of quality risk assessment and improved performance management strategies that position the companies for future growth. Factor in that U.S. rating agencies are moving toward implementing stricter corporate data and risk management as well as capital modeling strategies, and it will be essential for U.S. insurers to get on board with Solvency II best practices in order to ensure that they can not only maintain their competitive advantages, but that they can continue to compete in general.