90% of senior financial services executives predict Solvency II will reduce competition
90% of senior financial services executives expect the implementation of Solvency II* to reduce choice in the insurance market by pushing insurers to exit business lines that will no longer be as profitable for them, according to a survey by Interim Partners, the number one provider of interim managers to the private sector.
Andrew McIntee, Partner at Interim Partners, comments: “Solvency II will set minimum capital requirements that insurers have to hold for specific lines of business, which could significantly push up the cost of some business lines for insurers.”
“Insurers are investing a lot of resources in analysing how Solvency II will affect their business and they could take the decision to exit certain business lines if they conclude that will not be sufficiently profitable. If insurers are forced into exiting lines of business en masse, that is bad news for consumers because it will reduce competition and choice.”
Over 170 interim executives working in financial services took part in the research, many of whom have worked on Solvency II programmes for UK insurers.
Interim executives are managers or other senior executives, usually just below board-level, who are recruited on a short term basis.
Says Andrew McIntee: “A lot of insurers are bringing in expert finance interims as part of their preparation for Solvency II, to assess which lines of business will carry higher costs, so they can make a strategic decision on which lines of business to focus on.”
Interim Partners points out that full implementation of Solvency II is currently expected to take place on January 1 2014, however insurers will be expected to provide national regulators with their Solvency II implementation plans by mid 2013.
73% of the interim managers surveyed also predicted a wave of consolidation in the insurance market as a result of Solvency II.
Andrew McIntee comments: “There is a concern in the insurance industry that some insurers, particularly smaller ones, will no longer be able to operate as profitably under Solvency II and will have to find a trade buyer. More broadly, the high cost of regulatory compliance since the credit crunch, from preparing for Solvency II to more intrusive domestic regulation, means that insurers may look to M&A to generate efficiencies and cost savings.”
“Recent insurance M&A, like Chicago-based Ryan Specialty Group’s acquisition of Jubilee Group Holdings in May, has been about outside insurers trying to establish a presence in the London market. As the implementation date of Solvency II approaches, we could see an increase in insurance M&A activity driven by the new regulatory regime.”
Another finding of the research was that 88% of financial services interim managers believe that Solvency II will ultimately lead to increased insurance costs for consumers.
Explains Andrew McIntee: “The market is very competitive at the moment which is forcing down prices, but if regulatory costs increase and more mergers take place then that downward pressure will disappear.”
Do you think that the proposed Solvency II agreement will lead to consolidation in the insurance sector?
- Yes 73%
- No 27%
Do you think that the proposed Solvency II agreement will lead to the exit of some insurers from particular insurance markets?
- Yes 90%
- No 10%
Do you think that the proposed Solvency II agreement will lead to increased insurance costs for customers?
- Yes 88%
- No 12%
*Solvency II is a Europe-wide directive aimed at setting minimum capital requirements for insurers and standardising the way insurance companies assess risk and report profits.