Ferma's vice president is worried about the impact new insurance rules are having on buyers in Europe and Latin America
Solvency II, Europe's new risk based capital regime, and other insurance regulations could have a seriously detrimental impact on the insurance market and lead to a withdrawal of capactiy in some areas, according to Ferma's vice-president of Jorge Luzzi.
Luzzi, who is also group risk manager at Italian tyre maker Pirelli, believes there are two key issues that affect risk managers. The first is the possible detrimental effect Solvency II will have on insurers that specialise in one type of risk.
Solvency II could force monoline insurers to increase their capital reserves. Consequently Luzzi said that risk managers may have to move away from these specialist insurers potentially losing out on established relationships and insurance expertise.
“The other issue is whether there will be the same level of capacity in the market” added Luzzi. He said Solvency II will cause consolidation amongst insurers. Mid sized insurers will be forced to join forces with bigger, more diversified underwriters. "The question is whether the new companies will have the same amount of capacity as the two companies previously had.”
All this could cause the market to harden. “If there is a reduction in capacity, insurance products will be less available so the cost will increase” said Luzzi.
Solvency II has been criticised and praised in equal measure. In the immediate aftermath of the financial crisis there were serious concerns over how well capitalised insurers were and this has led to doubts about whether the regulations are up to scratch.
According to Luzzi, however, there is a danger that the insurance industry becomes overregulated. "After a crisis it’s difficult to have a clear mind.”
This is also becoming a problem outside Europe, he said. In June Ferma asked Brazil to repeal protectionist reinsurance regulations passed by the national board of private insurance (CNSP). This move was in support of the large number of Ferma's members whose companies have interests in Brazil.
“Brazil was very positive in 2007 as it deregulated its reinsurance market which had been dominated by monopolies for almost 50 years, but at the end of 2010 they modified again and added some restrictions on [international insurance companies]” said Luzzi.
These restrictions have a negative effect on foreign insurance companies that operate in Brazil. According to Ferma’s newsletter one regulation mandates a placement of 40% of reinsurance business with local reinsurers. These kinds of regulations can be to the detriment of capacity and competitiveness in the market, said Ferma.
There have been similar moves in Argentina and Luzzi, who's company Pirelli has major dealings in Latin America, is worried that protectionism could spread to other parts of the reinsurance market.
“Considering the importance of Brazil we are worried about how this could affect other countries. Imagine a country that legislates that all the risk must be insured or reinsured locally, there might not be enough capacity to cover that and companies could go bankrupt” he added.
Regulation and protectionism may increase in the current economic climate as there is increased competition for business and resources . Risk managers need keep on top of these issues, according to Luzzi.
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