Reinsurers already are meeting with some clients to discuss their reinsurance needs under Solvency II, but experts predict there will be a last-minute rush to comply that will strain the available human and capital resources.

Solvency II will enter into force in December 2012, but European regulators and policymakers have yet to decide key details of the rules that will govern insurers, including specifics of the standard formula that will drive capital requirements for many insurers.

That uncertainty and the limited resources of small- and medium-size insurers mean many companies will find it difficult to meet the implementation deadline, consultants say.

“Many of the larger companies have been preparing for Solvency II by developing internal models and improving risk management practices over the last few years and are making good progress with their implementation plans,” said Stuart Shepley, a partner in the financial services team at KPMG L.L.P. in London. “However, many of the small and medium-sized companies have not yet carried out the recent quantitative impact study (QIS4) and are unaware of the full implications for their capital requirements under Solvency II.”

In the United Kingdom, where preparation for the European Union directive is relatively advanced, insurers have moved on from their gap analysis to validating internal models and focusing on data quality and financial reporting under Pillar II, demonstrating adequate governance, and Pillar III, having adequate disclosure and regulatory reporting, said Bryan Joseph, partner at PricewaterhouseCoopers L.L.P. in London.

However, insurers in some European countries are only now embarking on their gap analysis and the improvements that the analysis shows are needed to comply with the directive, he said.

The lack of preparedness by some insurers is expected to lead to a last-minute compliance rush, which consultants say likely will increase the demand on limited and potentially expensive resources.

The closer the deadline gets, the more insurers will require expensive resources to comply even at the minimal level, Mr. Joseph said. Regulators, insurers and consultants already are competing for a limited pool of experts, and experts with actuarial, risk and specialist data management skills already are in great demand, he said.

Lloyd's managing agents have reported significant growth in actuarial resources during the past three years because of the demands from Solvency II. A survey published by the Lloyd's Market Association in August found that 382 people are working in actuarial roles in the Lloyd's market compared with 256 in 2007. Managing agents are forecasting that by the end of 2011 the number will increase by another 10%, the LMA said in a statement.

Even well-prepared insurers that use an internal model instead of the standard formula to calculate their solvency capital could suffer, experts say.

“A big challenge will be to get internal models in place and approved by the regulator,” said Chris Klein, London-based director of reinsurance market management at Guy Carpenter & Co. L.L.C. “Model approval is critical to many insurers' plans and will have a significant impact on required capital, but there is concern that regulators will not be able to get models approved in time,” Mr. Klein said.

Of the estimated 570 insurers in the U.K. that are expected to be affected by Solvency II, more than 110 firms had indicated their intention to join the London-based Financial Services Authority's internal model pre-application process as of Aug. 13, it said.

The limited internal resources of small- and midsize insurers mean they have to seek help from brokers, reinsurers and consultants to understand Solvency II, develop internal models, and establish risk governance controls and systems.

For example, many smaller insurers do not have the resources to create their own internal models, but brokers and actuaries are providing proprietary products that can be customized to suit an individual insurer.

In addition, some insurers are turning to brokers to help devise partial internal models covering only certain segments of their business, such as property catastrophe, said Marc Beckers, London-based head of Aon Benfield Analytics for Europe, the Middle East and Africa, a unit of Aon Corp.

“The standard formula does not adequately reflect the risks a company is running or give as much credit for reinsurance, and so some insurers have approached us for help with creating an approved partial model. This is far simpler than the full internal model, but it can reduce capital by better reflecting the risks an individual company is running,” Mr. Beckers said.

Reinsurers also are being approached by cedents keen to how they can use reinsurance to mitigate their risks and lower their required capital, reinsurers say.

“We are now receiving concrete inquiries for potential reinsurance solutions,” said Thierry Léger, head of the global client market division at Swiss Reinsurance Co. in Zurich, who said many insurers have increased their efforts this year and are taking practical steps to prepare for Solvency II.

Hannover Reinsurance Co. also is assisting its clients in understanding Solvency II, and helping them determine the drivers for capital needs and to manage the requirements, said Eberhard Muller, chief risk officer and chief actuary at Hannover Re in Germany. “We have internal projects under way to meet our clients' needs under Solvency II,” he said.

The calibration of Solvency II has yet to be finalized, although past quantitative impact studies suggest that insurers using the standard formula may face higher capital requirements than the current rules under Solvency I, said Philippe Brahin, head of regulatory affairs at Swiss Re in Zurich.

“But it is too early to tell what the final implementing measures will be, and so the potential for higher capital requirements are not at the moment a clear driver for reinsurance buying behavior,” Mr. Brahin said.

However, there could be greater demand for reinsurance capacity as a substitute for capital in 2011 when the rules are finalized and companies are able to better assess the amount of capital they will need for the business they are writing, said KPMG's Mr. Shepley. This could lead to a tightening of reinsurance capacity and price increases, he added.

In addition to offering capital relief, reinsurance can help companies mitigate capital charges for underwriting, reserving and catastrophe risk—three main risk categories under Solvency II, said Guy Carpenter's Mr. Klein.

For example, quota-share reinsurance can reduce premium volume, and excess-of-loss reinsurance can reduce volatility in the combined ratio, he said.

Volatility in reserve risk also can be reduced through adverse development or stop-loss reinsurance, while catastrophe risk can be reduced through reinsurance or alternatives such as industry loss warranties and catastrophe bonds, he added.

“Solvency II effectively requires insurers to hold more capital per unit of risk, but reinsurance can reduce that additional cost. Clients are now seeing this as they work through their Solvency II preparation,” Mr. Klein said.

Demand for nonproportional catastrophe reinsurance also is likely to increase under Solvency II, said Hannover Re's Mr. Muller. “Capital requirements under the standard formula are geared to a 1-in-200-year catastrophe event, while many insurers currently only buy for a 1-in-50 or 75-year event, and could create more demand for reinsurance,” he said.

Reinsurance is important under Solvency II, so it should stimulate demand, Mr. Klein said.

“But reinsurers have excess capital at the moment and, assuming there is no large loss, there is sufficient capital to meet any increased demand,” Mr. Klein said.

Solvency II also could increase the cost of capital for certain lines of reinsurance, however reinsurers may be able to absorb this cost, he said. “Solvency II is just one of many pressures on pricing, so we will have to see if Solvency II pushes up the price of reinsurance.”