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University of St. Gallen’s Schmeiser discusses Solvency II, risk management
Hato Schmeiser, Professor for Risk Management and Insurance Economics at the University of St. Gallen in Switzerland, talks to us about the upcoming Solvency II regulations in Europe and how they differ from the way that insurers and reinsurers have been regulated until now. Professor Schmeiser was speaking on the fringes of the RÜSEM event for German-speaking reinsurance buyers hosted between May 2–5 and May 9–12 at the Swiss Re Centre for Global Dialogue.
What is the objective of Solvency II?
The main idea and goal of the Solvency II project is to have an economic and risk-based capital standard. This has not been the case so far as Solvency I calculates capital needs based on volume. In addition, in a global market it is desirable to have the same conditions in place for all market participants.
Furthermore Solvency II promotes market discipline since it demands the publication of crucial information with regard to safety buffers that insurance companies have in place. As a result, market participants, whether investors or clients, have more information at hand and can choose specific insurance companies that are in line with their economic goals.
On the downside, companies will have a lot of additional work to do and the new regulation could lead to notable costs in the industry.
What would happen if it did not exist?
This is a difficult question. As a tool, Solvency I does not really allow us to make inferences about the safety level of a company. Hence, if we did not have Solvency II, we would be more reliant on the information and signals that ratings agencies provide.
However, in the wake of the financial crisis there has been a lot of criticism about them. Solvency II, on the other hand, should ensure more transparency than Solvency I. If it is able to prevent insolvencies and thereby reduce the threat to policyholders and to the industry as a whole, then it makes sense.
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