When the European Insurance and Occupational Pensions Authority enforces its new Solvency II regulations from January 1, 2013, the European insurance industry will graduate from a haphazard map of national regulations to a single, uniform system of rules. There is still uncertainty over the final regulations, but it is clear there are likely to be sizeable near-term implications for asset allocation.
At present, Europe’s regulatory models vary greatly. In each country, a different ‘magic’ asset class has come to be regarded, over time and, through practice and regulation, as the best long-term match for insurers’ liabilities. The magic asset class in the UK is credit; in France it is equities; and in Scandinavia it is infrastructure. Solvency II will force insurers in every country to converge on a single investment approach, but from a very different starting point.
While Solvency I focused on the ability of insurers to meet liabilities as they fell due over time, with assets assessed according to their long-term characteristics, Solvency II focuses more on the short-term market value volatility of assets versus liabilities.
At present, industries in each country are lobbying fiercely to steer the universal rules towards their preferred asset class. However, given that the basic concepts of Solvency II differ so fundamentally, changes will occur for most insurers and the impact will be far-reaching for the wider financial markets.