As the Solvency 2 deadline moves closer, and the framework itself becomes clearer, the strategic implications for the industry come to the forefront. In our view, Solvency 2 will act as a catalyst for significant change with profound strategic impacts, as laid out in our latest research report, Solvency 2: Quantitative & Strategic Impact - The Tide is Going Out.
Jointly with Morgan Stanley, we have applied the Solvency 2 framework to the industry overall and on individual business models. Based on this proprietary analysis we show that:
- The solvency ratios of European insurers will decrease from ~200% under Solvency 1 to ~135% under Solvency 2 on average
- A fundamental reappraisal and restructuring of traditional participating business can be expected
- Cost of capital is likely to increase in the short-term
- Reinsurers will be winners of Solvency 2, while geographically localized, smaller insurers - including many mutuals - may suffer
- A step change in ALM capabilities and an adjustment of investment strategies is required
- European groups may need to reconsider their competitive position in markets with 'non-equivalent' regulation, as the US is likely to be
