Solvency II, a new EU wide capital regime, was put in place at the start of this year after more than a decade of deliberation and millions of dollars spent in set up costs.
The introduction of these new rules is expected to alter the insurance industry on a grand scale and could lead to another record breaking year for mergers and acquisitions.
Solvency II will take a risk based approach to the capital requirements and the EU insurance regulator, The European Insurance and Occupational Pensions Authority, will oversee compliance to these rules.
However, the Financial Times explained that it is up to local regulators such as the Prudential Regulation Authority in the UK to manage how insurance companies put the regime into practice.
In order to comply with Solvency II, the FT highlights that an insurer would require enough capital to have 99.5% confidence that they could cope with expected losses. “The riskier an insurer’s business, the more precautions it is required to take,” the FT reports.
Alongside this, it is recommended to look out for the Solvency Capital Requirement (SCR), which is the number that reveals the amount of capital that insurers are required to hold.
A surge of mergers and acquisitions are expected as a result of this change in regulation as larger insurers will look to “diversify” further and the smaller businesses will merge with specialised businesses or combine with other companies.
According to Dealogic, insurance M&A increased by 60% in 2015 with a global insurance deal value of $118 billion and as Solvency II is an EU wide capital regime, deals will become easier to make as all countries are on the same page regarding control.
Prior to the launch this month, CEO and founder of business process management firm Accountagility, Robert Gothan, who has been working insurance firms in order to prepare for the implementation of Solvency II, highlighted that it was imperative that companies ensured that their infrastructure was also ready for any potential adverse effects.
"Solvency II is changing the way that insurers need to submit their data, so it is crucial that firms are prepared for any adverse effects by ensuring that the computation is right ahead of time. At the same time, firms also need to understand that this will not be a one-off process, but instead require constant reviewing and regulation of the model in order to ensure that Solvency II remains smooth into 2016 and beyond," Gothan said.
Gothan continued to say that this regulation should help the insurance sector become one of the stronger industries in finance. "Despite the headaches that some companies have experienced in the preparation process, insurance has recently been one of the stronger financial markets, so firms should see Solvency II as a positive opportunity to flourish and modernise."
Take a look at our infographic which looks at how the insurance industry is being disrupting by newcomers.