The scientific mirage
Europe is currently engaged in the preparation of the application measures of the
Solvency II Directive :
The work recently carried out by
CEIOPS
on behalf of the European Commission leads to a significant shift
in the capital requirement (in the region of 40%) compared to the other simulations
that took place shortly before the vote of the European Parliament and the
agreement of the Council.
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This shift is possible only because the scientific foundation of the requirements
is extremely fragile, if not non-existent, in certain areas.
Did
the decision-makers
Members of European parliament, European commission, CEIOPS etc …
really fully understand what they were choosing and voting for in the name of modernity,
given that they did not have a clear explanation of the foundations of these prudential regulations?
Whilst the validity of the search for better control over risks cannot be disputed,
there are grounds to fear that the accumulation of mathematical formulae has only
served to further blur the issue, rather than to clarify it.
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On the whole, in its current form Solvency II will be counter-productive and harmful, given the incentives it contains:
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It will be harmful to consumers because, for example,
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Harmful to the stability of the economic system,
since it favours the exteriorisation of margins and profits as quickly as possible,
at the risk of creating cycles and false expectations regarding results
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Damaging to democracy, since its extreme complexity makes the results
entirely dependent upon the values used for the parametering of the
models and therefore it will be impossible to check if
the company’s supervision ,
particularly that of the multinationals, has been correctly carried out.
This will have two consequences: there is a risk, for the policyholders,
of the company going bankrupt and an unlevel playing field between the insurers
and the different countries.
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There is a need for a rapid reframing of these regulations, in the spirit of the current
concerns of the majority of the governments, in order to bring about:
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A greater degree of simplicity to ensure a greater degree of real control,
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A wider political vision
of the global role of insurance companies, so as to ensure a sustainable offer,
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A better understanding
of the issues which are specific to risk insurance on the one hand
and pension related activities on the other and also, long term/short term risks
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The elaboration of the level 2 and level 3 measures must provide the opportunity
to move away from dogmatism, in order to impress upon the European Commission the
urgent need to open up a more political debate on the current calibration phase so as
to decide, in a frank and open manner, on reasonable measures that explicitly correspond
to a specific economic burden before a necessary revision of the directive.
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Long term guarantees versus short term guarantees
The longer the insurance guarantee, the more the profits for the insurer are hypothetical.
This is the reason, for example, why pension guarantees or construction risk guarantees
are often underwritten by not-for-profit companies (mutuals, pension funds, National House
Building Council (NHBC) etc...) who provide a real service to consumers.
The excessive penalisation
Excessive penalisation = the need for a higher capital requirement for these
risks than experience and a correct analysis would suggest.
, without an objective reason, of the requirements for these long
risks or any attempt to require them to hold assets that are inappropriate to
their coverage
Assets such as shares and property may appear to be risky in the short term, but over the long term they
may be a good complement to bonds in order to cope effectively with different economic scenarios.
, may lead to the disappearance of these actors and this would have considerable consequences for
the people of Europe
As has already been seen, major actors with diversified offers
are capable of suddenly withdrawing from a market. The disappearance
of specialised suppliers could lead to the complete disappearance of
the insurance offer or to a brutal increase in prices.
and would burden the politicians with a weighty responsibility.
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Economic instability
Encouraging companies to take out all of the margins that exist within
the technical provisions in order to transfer them to the companies own funds, often via the P&L
item Results of the year (therefore paying taxes and serving as bonuses and dividends
for joint stock companies) run counter to the concerns expressed by the governments
to stabilise the banking system.
Solvency II will increase the volatility of the insurance sector by alternating visions
that are either too optimistic or too pessimistic through a more marked variation of
own funds and of the results and by unduly worrying or reassuring all of the stakeholders
(policyholders, supervisory authorities, shareholders, credit agencies, etc.).
Although insurers do cover risks that may be calculated by statistics,
there still remains a degree of uncertainty. While risk that is
statistically quantifiable is controllable since it may be demonstrated,
uncertainty may be estimated through the assessment of economic, industrial
and political, but rarely mathematical, elements, and is related to characteristics
that are specific to the profession. This whole process takes place within the
context of an on-going dialogue with the supervisory authorities.
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Regulatory capture
The regulatory authority’s ability to remain impartial is being eroded
(since the regulator falls within the sphere of influence of the parties that are subject to regulation).
The complexity of the calculations which, in practice, do not allow for the stated
degree of rigour, will make the assessment of the reality of the controls carried
out by the authorities impossible and will introduce a risk for the policyholders
and/or an unlevel playing field.
