Solvency II hovers over the insurance industry’s horizon like a threatening thunderhead, promising a violent reshaping of the investment landscape when it finally breaks. The absence, so far, of any wholesale rush to transform their asset profiles may simply be the calm before the storm, particularly since detailed rules have yet to be finalised. But it may also be, as some believe, because the change will be rather less dramatic than prophesied. One insurance banker says it reminds him of the Millennium Bug – frenzied anticipation and a boom for consultants followed by, well, business more or less as usual.
This is not to suggest that Solvency II will not revolutionise the way insurance companies in the EU look at their balance sheets. It is their Basel II and III, forcing them to take a risk-based approach to the capital they require. Under the old regime – which still applies, further restraining any headlong changes for the time being – capital requirements were calculated only against liabilities. They took no account of asset risk or of any mismatch between assets and liabilities. At the same time, each EU jurisdiction had its own country-specific rules on asset holdings.