As the implementation of the new Solvency II rules looms nearer, European insurers are starting to feel the pinch as their share prices experience steep falls.
Dutch multinational firm Aegon, owner of the US insurer TransAmerica, saw its stocks lose as much as 23 percent this month after announcing that its capital surplus would end up lower than expected. The same thing happened to Amsterdam insurer Delta Lloyd, which experienced a 43 percent plunge in share prices.
These gave smaller European insurance companies a fright, leaving them wondering how to comply with the new rules in Solvency II while also dispelling doubts about their companies' overall financial health and minimizing the risks involved.
The aim of the European Union's Solvency II is to bolster insurers' resilience against market catastrophes, which are historically expected to happen once in every 200 years. Smaller insurance companies are expected to comply with the standard model, which obliges them to have a higher capital, while larger firms can make their own internal models that have to be approved by regulators.
But while regulators have spent more than a decade planning its implementation, only Germany's Hannover Re has secured approval for its internal model so far. Some executives think that the Dutch regulator is particularly tough on the insurance market, but many of them think that the risks extend outside of the Netherlands, and that most share prices are vulnerable.
"We see risk skewed to the downside from Solvency II. Even in the best case scenario of a benign result, we do not expect share prices to react positively," said Gordon Aitken, analyst at RBC Capital Markets. The opacity of the talks between regulators and insurers also adds to the uncertainty of investors in determining companies at risk.
Solvency II is set to be introduced on January 2016, but insurers are given 16 years to comply with tougher valuation methods. Still, the staggering amount of red tape and the risks involved that will put European insurers at a disadvantage to their US rivals can make the new rules a bit harder to implement.
"It will take one or two years before people have a level of comfort with the new rules and uncertainty about them declines," Felix Hufeld, head of Germany's BaFin, told Reuters.
