Life Insurers In U.S. and Europe Eye Solvency II’s Impact

With uncertainty surrounding Europe's Solvency II capital adequacy regulatory framework, life insurance companies on both sides of the Atlantic are likely reviewing their more complex products, along with investment portfolios, ahead of the regulatory changes looming on the horizon.

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Solvency II, the new solvency regime for European Union-based insurers and reinsurers, may increase the amount of risk-based capital that a European company would need to hold for solvency, said Howard Mills, chief adviser for Deloitte's insurance industry group. This would restrict how a company could use its excess, or deployable, capital — whether it's money to make acquisitions or develop new products, he said. Under Solvency II, an insurer would have less of this extra money, Mills said.

It becomes a huge competitive issue in the United States, in particular in the fixed and indexed annuities market because this is where the foreign companies are big, said Steven Schwartz, an equity analyst with Raymond James. If, for example, Aviva USA has to hold a lot more capital than U.S.-based companies American Equity, Midland National Life Insurance Co. or Security Benefit Life Insurance Co., it won't be competitive, Schwartz said.

Part of Solvency II, due to take effect on Jan. 1, 2014, involves allowing the use of other countries' risk capital and governance requirements outside the eurozone for group solvency and supervision requirements, said Mary Pat Campbell, vice president at Conning Insurance Research & Consulting. Equivalence refers to whether National Association of Insurance Commissioners' risk-based capital amounts could be used to assess a group's solvency, Campbell said.

European-based companies with U.S. life insurance company subsidiaries include, among others, Aviva plc, Allianz SE, Aegon NV, Prudential plc, Axa SA Group and ING Groep NV.

The big issue is whether the United States will be granted equivalency, said Schwartz, noting the NAIC's RBC is "somewhat less stringent than" Solvency II.

"Will the EU regulatory authorities tell Allianz that it must significantly raise its capital in the United States in order to meet Solvency II standards and therefore Allianz will no longer be competitive?" Schwartz said. "Or will they say that the United States knows what it's doing, and as long as Allianz meets U.S. standards, the EU regulatory authorities will be OK with Allianz and its U.S. subsidiaries?"

The NAIC isn't happy with Solvency II, Schwartz said, adding it wants products to be affordable. Also, would Germany tell MetLife that it can't participate in Germany because it doesn't meet the German standards, Schwartz said.

If the U.K.-based Aviva plc were to sell its U.S. operations, the sale might be triggered by the effects of Solvency II, Barrie Cornes, an insurance analyst with Panmure Gordon & Co., said in April. At an investor conference, the now-former Aviva plc Chief Executive Andrew Moss said the company is open to offers for its U.S. operations, which Aviva acquired in late 2006 for more than 2 billion pounds (US$3.2 billion) (Best's News Service, April 13, 2012).

In general, Solvency II "and its potentially heavy capital requirements, is one of the reasons life companies would look to sell some of their U.S. operations," said Anandi Nangy-Kotecha, associate director, analytics, A.M. Best Europe – Rating Services Ltd.

Earlier this month, Aviva announced the immediate departure of Moss as CEO. Chairman-designate John McFarlane stepped in immediately as interim executive deputy chairman. In Aviva's case, a strategic review of their lines of business is underway, and it's planning to announce its results in July, said Nangy-Kotecha.

Another question would be whether fixed annuities, including indexed, with their substantial capital charges, would be much more capital intensive under Solvency II.

Allianz Life Insurance Company of North America, a unit of Germany'sAllianz SE, remained the U.S. sales leader for indexed annuities in 2011, with sales of $6.3 billion, according to AnnuitySpecs.com. Capturing second place was Aviva USA, the unit of Aviva plc, with sales of $4.5 billion. American Equity Investment Life came in third, with sales of $4.3 billion.

For life and annuity products, the "most extreme" Solvency II requirements for capital and reserves could come from non-diversifiable risks, such as the financial guarantees, Campbell said. The financial guarantees on variable annuities are "highly correlated" within a block of business, she said.

The NAIC's Own Risk Solvency Assessment implementation is emerging as a "middle ground" in the Solvency II and SMI debate, Mills said.

Kevin M. McCarty, president of the NAIC, told Best's News Service the NAIC is "encouraged by efforts such as the EU’s Solvency II to modernize regimes around the world and improve the international regulation of insurance." While U.S. insurance regulators do not plan to adopt Solvency II, "we are examining the effort through our Solvency Modernization Initiative to find enhancements that might fit our own system," McCarty said in an email.

"It is important that the U.S. and Europe develop a mutual understanding of our respective systems, avoid creating competitive imbalances, and lay the groundwork for greater regulatory cooperation going forward," McCarty said. "This work will ensure that life insurers and their customers benefit from strong, competitive, and well-regulated markets on both sides of the Atlantic."

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)