Lloyd’s to lobby for lower Solvency II catastrophe reserve

With Solvency II due to come into effect during 2012 re/insurers are assessing the capital requirements specified under the new regulatory regime. One of the main changes under Solvency II will be the requirement for re/insurers to have greater catastrophe reserves in place as part of the capital adequacy requirements.

Lloyd’s of London has come out as not in favour of the requirements as they currently stand. Under the current capital adequacy proposals for Solvency II Lloyd’s says that it would be required to hold double the amount of reserves it currently sets aside for catastrophe reserving.

During the recent Solvency II test run Lloyd’s found that the capital requirements they were expecting to hold were twice as high as previously. Richard Ward, chief executive of Lloyd’s said that this is ‘too onerously calibrated’ and that it does not work for a global player the size of the Lloyd’s market in an interview with the Financial Times. Lloyd’s plans to lobby to seek a more sophisticated model for themselves which would result in a lower catastrophe reserve requirement.

With re/insurers soon to be expected to hold much more capital in reserve it may help to make catastrophe bonds an attractive proposition as the longer term (usually three years) of a cat bond deal could help with their capital adequacy accounting. Rating agency Fitch recently said they see the potential for Solvency II to increase cat bond issuance. Some industry insiders say that they expect the new capital adequacy regime under Solvency II to increase interest in both industry loss warranties (ILW) and insurance-linked securities (ILS) in the long term. Could we see an organisation the size of Lloyd’s tapping the capital markets for risk transfer to secure its capital adequacy in future? It’s possible considering the majority of companies within the Lloyd’s market would be too small to issue such capital market instruments on their own, so a pooled approach could become more attractive.