Europe Should Scrap Solvency II’s Internal Models, Hiscox Says

European regulators should scrap insurers’ internal models used to set capital requirements under Solvency II, according to Hiscox Ltd. Chief Executive Officer Bronek Masojada.

The European Union’s Solvency II regulations are too costly, complicated and risk being ineffective in a crisis after 10 years in development, Masojada said today at the Economist’s Insurance Summit conference in London. Prudential Plc CEO Tidjane Thiam said a one-size fits all approach to regulation for the EU’s 27 member states won’t work.

“Imagine if we all drove cars with individually set speed limits based on the suspension and the wheels and the design of the car,” Masojada said. “Models can never be made that good.”

Policy makers including Andrew Haldane, executive director for financial stability at the Bank of England, have criticized Solvency II’s use of internal models because a flawed system of banks self-reporting capital reserves under Basel II was one reason behind regulators’ failure to spot the financial crisis of 2008. There’s a danger insurers will do the same under Solvency II, Haldane told U.K. lawmakers in November.

Insurers may be willing to scrap their internal models when they realize how much they’re going to cost over the next few years, Masojada said.

In approving the use of internal models, regulators were giving insurers what they wanted, said Julian Adams, director of insurance at the U.K.’s Financial Services Authority.

Firms have now learned a “costly lesson over the last 10 years,” said Simon Lee, CEO of London-based RSA Insurance Group Plc. The rules will cost RSA about 20 million pounds ($31 million) to implement in 2013, he said.

Implementation Delayed

Solvency II will cost insurers 2 billion euros ($2.7 billion) to 3 billion euros initially and 500 million euros a year once the rules are in place, according to Insurance Europe, a Brussels-based industry lobby group.

Regulators have pushed back the implementation date of Solvency II to 2016 or 2017 from 2014 because of objections from insurers over how much capital the rules require to back long-term guaranteed products such as annuities. The EU needs to build in more flexibility if the system is to work, Thiam said.

“I can see how attractive having one consistent framework for 27 countries may be,” he said. “I may even be willing to consider that it may be achievable, but it’s clear that so far it has proven extremely costly and formidably difficult. One size fits all does not work and is not likely to work particularly in our industry.”

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