|Hopes now seem optimistic that Solvency II, the EU's planned directive on capital adequacy in insurance, will follow smoothly from the implementation of the Basel II-derived Capital Requirements Directive for the banking business. The first draft of the directive is due out this October, with expectations of a 2009/2010 implementation, and criticism is developing.
The Association of British Insurers (ABI), whilst supporting the need for new solvency regulations, is concerned that Solvency II does not result in the continued rigid requirements for static capital. The ABI are keen that the new regulations allow capital to be used as a dynamic essential component in producing new requirements. Paul Barrett, ABI policy adviser on financial regulation and tax, was recently quoted in the FT saying, "The UK (insurance) industry is lithe, lean and dynamic. If the present system lives on, this could dump a brick in a rucksack on its back."
In a separate announcement, the European Shadow Financial Regulatory Committee (ESFRC), a group of European professors and other independent experts in the fields of banking, finance and the regulation of financial institutions, has criticised the intention to base Solvency II on the Basel II concept. Their view (Statement No. 24) is that the Basel II approach, designed principally to avoid systemic risk in the banking markets, will result in an unbalanced approach and limit the ability of banks and insurers to shift risk between each other. They also comment that banks and insurance companies are very different in their capital dynamics and that reinsurance, life and non-life cannot be treated in the same way.