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Guy Carp: regulatory change will test balance sheets

The cost of managing looming regulatory changes is likely to hit reinsurers' bottom lines, according to Guy Carpenter.

The reinsurance broker claimed in a report released last week (14 September) that upcoming regulations - including Solvency II and the accompanying Own Risk and Solvency Assessment - will have a profound effect on (re)insurers' balance sheets and risk management practices.

Under the European Union's Solvency II Pillar 2 reporting requirements, which set out the fundamentals of corporate governance, (re)insurers must provide a projection of the risk and capital position for the entire planning period of at least three years.

This estimate has to be consistent with the business case balance sheet and profit and loss forecast.

Meanwhile, Pillar 3 states that European (re)insurers must provide a Regular Supervisory Report to the regulator as well as a Solvency and Financial Condition Report to be published for clients, financial analysts, rating agencies and other stakeholders.

Each of the two reports consists of a narrative risk report where companies have to describe their risk strategy, risk governance system and risk management processes, and complete extensive quantitative reporting requirements in the form of the Quantitative Reporting Templates.

Guy Carpenter noted that (re)insurers had already invested heavily in data management systems, but that further investments were still necessary.

James Wrynn, vice chairman of Guy Carpenter Strategic Advisory (US), said the costs associated with compliance and disclosure would continue to rise as insurance regulators and rating agencies increased their scrutiny of the industry.

"In addition to the increased administrative cost of compliance, higher risk-based capital requirements often reduce the strategic flexibility of insurance company operations and ultimately lower returns," he said.

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