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German insurers can digest Solvency II: Consultancy

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FRANKFURT (Reuters)—Germany's insurers will face only a moderate additional capital burden when adjusting to new European risk rules due to come into force in 2013, management consultancy Zeb said on Wednesday.

The country's insurers will need up to €5 billion ($7.09 billion) in additional equity capital under the new rules, known as Solvency II, which should be manageable in view of the current equity base of about €92 billion ($1.31 trillion), said Sven Jansen, a partner at Zeb responsible for insurance risk management.

Most of the fresh funds will be needed for life insurance business and to a lesser extent for health insurance, while property/casualty business overall will require no additional capital, Mr. Jansen told a journalist briefing.

The new rules, being developed by the European Commission and the European Insurance and Occupational Pensions Authority, are aimed at protecting policy holders by making insurers more closely match their capital buffers to the risks they hold on their books.

They will require big investments in information technology and training on the part of insurers, many of whom say the requirements are too complex and onerous.

Mr. Jansen calculated implementation costs in Germany for the industry at €250 million ($354.7 million), with complex players like Allianz S.E. and Munich Reinsurance Co. shelling out more than €10 million ($14.2 million) apiece to get systems up and running.

Even small insurers face startup costs of €500,000 ($709,450) to €2 million ($2.8 million), he said, adding that annual running costs for all insurers thereafter would be around 20% of the initial investment.

Big insurers planning to use tailor-made “internal models” for their risk control and reporting would probably spend €3 million to €5 million ($4.3 million to $7.1 million) per year in running costs after startup, he said.

Many insurance observers say that the complexity of Solvency II plays to the strengths of the most sophisticated and diversified insurers, to the disadvantage of smaller rivals.

The rules are prompting insurers to rethink their market positioning and product lines, Mr. Jansen said, adding that he expected return on equity of around 5% for life and health insurance and more than 10% for property/casualty business after implementation in 2013, depending on the type of business model.

For-profit investors might find life insurance RoEs too low to be of interest, but other insurers might thrive, he said.

“Public sector insurers, mutuals and smaller players have good chances under Solvency II if they correctly position themselves,” M. Jansen said, adding that these insurers might continue to meet the public demand for insurance products with a guaranteed component that bigger players felt were no longer attractive.

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