Wednesday, 30 May 2012

Morgan Stanley and Oliver Wyman - Solvency II "The Long and Winding Road"

I came across a very high quality thought paper from the double team of Morgan Stanley and Oliver Wyman (you will need to sign up, but nothing intrusive), regarding the expected impact of Solvency II implementation on the industry as a whole, looking from an investors perspective in the main.

At 60 pages, it touches on just about everything you might want for Board/Exec and even personal briefing. I particularly liked:
  • Unlikely that Solvency II will become a global blueprint for insurance regulation
  • Cost of capital is likely to increase for insurers
  • Winners and losers will ultimately take longer to emerge, due to grandfathering having less of an effect on strategies in medium term
  • Non Life and Reinsurers are likely to be amongst the winners, with traditional life companies losing out.
  • Suggesting product pressures will lead to more back-book consolidators and unit-linke/VA products
  • The "weak insurers" will take on more reinsurance
  • Matching premiums may encourage investment in illiquid classes
  • More pragmatism expected around equivalence (for our US pals)
  • Nice piece on p6 on attractiveness of different asset allocations
  • " some jurisdictions the model approval process is proving to be very cumbersome" - Well spotted Sherlock!
  • Nice table of Key Debates on p8, and throrough coverage of each of those debates follows, with liability measurement given a lot of airtime in particular (for obvious reasons)
  • Good section on the Euro-cracy side of things p28-33, covering Omnibus II, prospective calendars etc
  • Nice comment that, while sovereign debt risk may not necessarily be picked up in the regulations, Internal Models and ORSA would certainly be expected to reflect it. In addition, the phenomenon of "domestication" of balance sheets by EU insurers is also touched upon, along with the rationale (p36-37)
  • Exploration of the potential for diversification benefits for insurance groups without the provision for Group support (p44-45)
  • Decent section on Internal Model vs Standard Formula, and comment on how investors may struggle to compare like with like (p46-47)
  • Expectation that local supervisory differences will continue despite increased co-operation required for Group supervision (highlighting IM approval as one particular area where the wheels may be greased better in some countries than others)
As for their choice of Beatles song in the document title, I would have personally gone with "When I'm 64" (which is when it feels like the trialogues will have finished!), or maybe "Help" (no explanation required!)...



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