Acuity says with the Committee of European Insurance and Occupational Pensions Supervisors Level 2 advice on the calibrations for calculating Solvency II capital having been published last month the requirements on firms is becoming much clearer.
The firm estimates that for a cross-border life company writing 95%+ linked-life business, the solvency capital required by the current ‘one dimensional’ Solvency I measurement might be reduced by as much as one third. However, Acuity says the new risk-based elements of Solvency II are likely to see increases in solvency capital requirements due to some specific aspects of cross-border life business.
Acuity says of relevance to cross-border life companies will be requirements to assess:
- Lapse risk – perhaps the risk with potentially the biggest impact on solvency capital, especially for those companies writing regular premium business with poor levels of persistency
- Counterparty default risk – this would almost certainly include indemnity commission debts
- Life company expense risk – ‘soft’ payments to distributors and ‘marketing costs’ might form part of this but might also include the impact of changing expense rates, mismatching income and expenses
- Asset concentration risk – a relevant issue where the cross-border life company ends up holding a large portion of a boutique fund via a series of portfolio bond investments
The firm added that while there is a possibility for most cross-border life companies the Solvency II bill could mean their capital requirements are lower than they are currently, for those writing traditional international regular premium business it is clear “a number of the sectors’ historic demons may be about to be a little harder to ignore”.
