The Solvency II SME paradox

Proportionality
Back in 2002, when Solvency II was in its infancy, both the “Sharma Report” and the KPMG background survey, which guided much of the thinking at the outset, noted the importance of maintaining the nature of the industry and the trappings of the one-size-fits-all solution. The Directive text states, “The Commission shall ensure that implementing measures take into account the principle of proportionality, thus ensuring the proportionate application of this Directive, in particular to small insurance undertakings.” Solvency II is supposed to be applied in proportion to the size, nature and complexity of the risks of the undertaking: many feel this is not the case, in part because they still wait for guidance on the practical application of the principle.Not only excessive but also ineffective
Proportionality is crucial for the survival of smaller firms under the regulation, “Typically, SMEs have simple structures and risk profiles,” the CEA states in a report published this year. “An across the board application of the current Pillar II and III requirements to SMEs is likely to be excessively burdensome and would, in effect, result in their policyholders paying excessive and unnecessary costs.” The CEA report highlights a number of concerns: Public disclosure will only be effective if someone reads the report, but currently disclosure is too complex and detailed. Policyholders are unlikely to read and understand complex financial documents while many SMEs are too idiosyncratic for analysts or the media to take an interest. Instead the CEA proposes a short ‘executive summary’ style report. Similarly it argues that the supervisory reporting is also too complex and of little use to regulators given the “simpler structures and risk profiles of SMEs.” In the context of governance, regulators should apply proportionality with a view to achieving the underlying objectives, and consider that in smaller firms knowledge is more widely shared – therefore individuals should be allowed to preform multiple roles. The focus should be on an individual’s ability to do a particular job rather than their specific qualification. There is also a concern that the ORSA will become “an internal model through the back door” and regulators should allow firms to develop an ORSA process that reflects their needs.Solvabilité II, a good question but poor answer
One organisation that is particularly vocal about the effect of Solvency II on SMEs is ROAM (Réunion des Organismes d’Assurance Mutuelle) – a professional association of French mutuals. The association runs the Stop Solvency 2website; its byline “a good question but poor answer” sums up its views.
Solvency II and SMEs


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