AFM Comments on Solvency II publication from FSA

Commenting on the FSA’s consultation paper on implementation of the Solvency II Directive, Martin Shaw, Chief Executive of the Association of Financial Mutuals stated:


“We welcome the publication today of the FSA’s consultation on transposition of Solvency II into the FSA rulebook. Whilst full implementation of the directive is being delayed it is vital for the industry to have clarity now on what the rules will look like in the future.


“Solvency II provides a comprehensive approach to capital management across Europe, and its role in promoting financial stability and consumer protection is a vital part of retaining confidence in the European insurance sector.


“The FSA’s estimation of £1.9 billion in implementation costs for the UK insurance industry demonstrates the financial onus on the sector in order to be compliant when the directive is transposed into UK law. Not only do insurers of differing sizes have to contend with these up front costs, but the ongoing compliance bill will be in the region of £200 million per year. In mutual insurers, of course, those costs are borne directly by consumers and £1.9 billion equates to at least £10 for every policy.


“This makes for concerning reading, particularly given the broad range of other regulatory projects insurers have to cope with at present.  Small mutuals in particular will bear a disproportionately higher cost as many of the costs are not scalable, and they have a smaller customer base to share the costs over.


“FSA’s analysis also indicates that whilst capital holdings in aggregate are sufficient, around 20% of UK insurers face a shortfall of £12.5 billion.  We expect that the true amount of the shortfall will be much lower by the time Solvency II goes live, as insurers act to retain profits and change their business structure to reduce the amount of capital required.  We might also see an increase in strategic action, including disposals of back books and further consolidation.” 

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