Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Solvency II capital rules may spark insurer mergers and acquisitions

Reprints
Solvency II capital rules may spark insurer mergers and acquisitions

As insurers and reinsurers across Europe make their final preparations for Solvency II, the introduction of the long-awaited risk-based capital rules may spark merger and acquisition activity.

While many insurers and reinsurers are well-prepared for the new regime, which will come into force in 2016, those that find aspects of the rules too onerous could become takeover targets, experts say.

“Over the coming year, the re-energizing of Solvency II will see insurance firms weighing the expense against the benefits of compliance in the lead-up to 2016 implementation,” London-based accountancy firm Moore Stephens L.L.P. said in a December note.

At the end of November, the European Insurance and Occupational Pensions Authority, the Frankfurt, Germany-based supervisor of insurers and reinsurers in Europe, released the results of a “stress test” of companies' readiness for Solvency II and said the insurance sector was “in general sufficiently capitalized in Solvency II terms.”

But experts say there is still work to be done for many companies to ensure they are ready for the regime, which will be phased in in stages beginning Jan. 1, 2016.

“Significant change lies ahead for Europe's insurers in 2015. After 15 years in development, the industry faces an intensive — and critical — period of final preparations for Solvency II implementation on Jan. 1, 2016,” Standard & Poor's Corp. said in a report on European insurers in December.

Rob Jones, managing director at S&P in London, said the reporting requirements of Solvency II may be particularly burdensome for smaller companies and could add to “the consolidation drivers in the marketplace.”

Solvency II and other solvency standard changes around the world are likely to result in “a significant increase in aggregate capital requirements,” Mr. Jones said during a presentation in London last month, “which may force smaller insurers to consolidate.”

Larger insurers are likely to benefit from diversification when their capital charges are calculated under Solvency II, London-based Fitch Ratings Ltd. senior director Clara Hughes said in a report.

But although the rules will take account of an insurer's size under the so-called principle of proportionality, “we believe the sharp increase in costs associated with Solvency II will be a greater burden for smaller firms, which are also likely to be less well-prepared,” the Fitch report said.

While there is still time for companies to change their business models and restructure ahead of the rules' implementation, many will be “vulnerable to takeover, and some may prefer that option,” the report said.

“A trend that has been more talked about than actioned is the sale of assets in response to the changing capital requirements of Solvency II — in particular around runoff,” said London-based law firm Clyde & Co. L.L.P. in a December report on mergers and acquisition activity in Europe.

“Despite this, many market respondents remain optimistic that there will be increased deal flow in this area — particularly in France and Germany — in the next few years,” the Clyde report said.

“The combination of a date for the implementation of Solvency II, as well as changes to local market regulations and the expansion of activity from the mature legacy market in London into mainland Europe is likely to stimulate future activity,” according to the report.

Sheena Harrison contributed to this report.