Amid speculation that Solvency II could be delayed until 2014, StrategicRISK investigates the risk management benefits of Europe's new capital regime for insurance companies

News that EU member states agreed a proposal that could delay Solvency II until 2014 triggered fresh interest in the changes that the new risk based capital regime could introduce to the European insurance market.

As it currently stands, Solvency II is due to come into force in early 2013 and most commentators hope it will help underline the importance of risk management at board level in some of the biggest insurance companies in the world.

Alex Hindson, head of group risk at the insurer Amlin and chairman of the Institute of Risk Management (IRM), said that “Solvency II frames the status and mandate for the risk function."

"It’s a pretty good driver for ERM,” he added. "Because the regulators want to see management decisions and business plans being based on risk information.”

“Unless you can demonstrate that you have genuinely efficient processes with the right level of risk management, Solvency II will hit you with higher capital adequacy requirement,” added Tony Armour director of business process solutions at DST Global Solutions.

"Suddenly there is an economic imperative at board level to improve efficiency and risk management practice."

Armour clearly believes Solvency II will promote risk management and improve efficiency in the insurance industry. “Many insurance companies have hugely complex and inefficient operating environments. Solvency II will improve the efficiency of these operations and the way companies manage risk.”

Insurance companies might even use Solvency II as a way to market and brand their products. “Solvency II compliance could give many organisations a line of marketing that they should exploit,” said Armour.

He added that Solvency II could bring with it improved efficiency and customer service. “You’re going to see customer migration towards companies that have a better level of customer service”.

Hindson reinforced the point that Solvency II could make some insurance companies more competitive. “If you do get internal model approval it will look good when you talk to the credit rating agencies” he said. “There is a commercial benefit from getting internal model approval. You avoid diverting capital into non-productive activity when it could be writing more business."

In other words, the lower capital requirements that come with an internal model could mean that some insurance companies have more capital available to do business.

Solvency II will overhaul the insurance industry with possible price fluctuations as capacity levels change. But the renewed emphasis on risk management that it also encourages could be an extremely positive thing for risk managers (both inside and outside of the financial services sector).

For coverage of the proposed dealys to the implementation of Solvency II click here.