Non-life insurance market robust under Solvency regime

A study of the non-life insurance market since the introduction in 2004 of Solvency I has found the capital adequacy regime to have been effective in reducing the number of company failures.

The study, commissioned by the International Underwriting Association of London, the Lloyd’s Market Association, the International Credit Insurance & Surety Association and the International Trade and Fortfaiting Association, also found that, since the introduction of the new regime, policyholders across the UK and EU have almost always been paid.

The study, carried out by KPMG, reviewed non-life insurance company failures in the seven key EU insurance markets, and concluded that the bulk of failures occurred in the early 1990s as a result of the rapid increase in asbestos, pollution and health hazard claims.

A marked decrease in the number and size of insolvencies followed the introduction of the Individual Capital Adequacy Standards regime in 2004, which raised insurers’ base capital requirements.

In completed insolvencies since 2004, all insurance creditors have been paid in full. In almost all cases, the companies which failed were small, unrated insurers operating in specialist niche markets.

The report supports the commissioning associations’ view that current proposed changes to the Basel III rules for calculating banks’ capital requirements do not reflect the very strong capital position of insurers which underwrite credit insurance, and therefore banks’ exposure to insurer default through credit insurance products. This position, it says, is further strengthened by insured banks’ privileged position as credit insurance policyholders relative other direct creditors, in place across the markets studied since the prioritisation of policyholders as creditors in 2004.

Head of non-marine underwriting at the Lloyd’s Market Association, David Powell commented: “This study shows the genuinely robust nature of non-life insurance companies in the UK and the EU, and the positive contribution of EU solvency regulations to further strengthening that position. Today it is very rare for an insurer to fail, and when they do, they have the resources to meet their commitments to policyholders in full. Only small, unrated companies have failed in the past 16 years, because more stringent capital requirements have dramatically reduced the frequency and severity of insurer insolvencies.”

Legal and market services executive at the IUA, Joe Shaw, said he hoped that the findings of this report will help further the conversation on the treatment of trade credit insurance products under the Basel III framework.

The insurance markets studied include the UK, France, Germany, Italy, the Netherlands, Sweden, and Gibraltar. Together they account for more than 75% of gross written premiums in the EU.

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