Solvency 2: The Long and Winding Road

April 5, 2012
Industry Trends
EMEA

Abstract

REPORT PREVIOUSLY PUBLISHED BY OLIVER WYMAN AND MORGAN STANLEY

The road to implementing Solvency 2 has been longer and more circuitous than expected.  In a joint report with Morgan Stanley, Solvency 2: A Long and Winding Road, Oliver Wyman provides insights on implementation progress thus far. The report also discusses key debates in the industry that will have a significant impact upon the insurance landscape across Europe, including:

  • Liability discount impact / matching premium / extrapolation
  • Asset management and investment
  • Impact of equivalence
  • Likelihood for back-book consolidation

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Overview

3

Solvency 2 Key Debates

8

Liability Measurement – the Most Crucial Aspect of the S2 Debate

9

 

Liability Key Debate 1: Base curve and extrapolation

9

 

Liability Key Debate 2: The illiquidity premium

11

Asset Allocation – Still Uncertain, but Change Is Likely

13

Timetable & Process – Delayed, but Still Happening

22

EU Sovereign Debt Crisis Creates Significant Challenges

34

Solvency 2 Equivalence Requirements Could be Problematic

38

Capital Structure Changing under Solvency 2

41

Internal Model vs. Standard Formula: A Difficult Choice

46

Clash of Regimes: Solvency 2 in a Broader Regulatory Context

48

National Supervisors Need to Increase their Co-operation

51

Solvency 2 Could Be a Catalyst for Closed Block Deals

53

Appendix I: The Structure of the Solvency 2 Balance Sheet

57

Appendix II: Glossary of Terms

58

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