Yeah, but no, but yeah, but Solvency II could cost regulators over €500m

Vicky Pollard, BBC

With national budgets squeezed like a small animal in the grip of a python, regulators must consider the cost of enforcing Solvency II with some trepidation. But what is that cost?

The EU Directive, set to overhaul the entire European insurance industry, is estimated to cost firms over €3 billion according to the CEA, the European insurance and reinsurance federation. Meanwhile, Hector Sants, Chief Executive of the FSA, estimates implementation costs to the regulator would be around £100m (€117m).

So here’s a thought experiment, could we extrapolate from the FSA figure to work out the cost of regulation for the whole of the EU?

If you are an actuary or statistician, stop. Right there. I know. This is way too simplistic and fraught with problems. But if you are willing to suspend your reservations for a few more paragraphs then walk with me, the results are interesting.

We know from Mr Sants the estimated cost to the UK regulator. If we know what portion the UK insurance industry is of the EU industry, we could derive a crude estimate of total regulatory cost.

Share of EU insurance market by number of companies, SOURCE: CEA

According to the CEA, in 2008 the UK formed 19% of the European insurance market, measured by number of companies (see chart). If the cost of regulating 19% of the industry is estimated to be €117m we can calculate (see table below) the total cost to all EU regulators as €526m.

Is that a fair price? Like everything else, it depends what you get for it.

Now, my dear actuary, to the validity of the figure. There are a number of issues to consider, one is the quality of the data – as it is based on an estimate by the FSA, and figures from 2008 – the other is the method:

  1. the calculation may conceal a basic initial cost associated with regulating any number of firms in an industry, a cost that would diminish to scale but will be born by all regulators no matter the size of the industry,
  2. some firms or types of insurance may cost more to regulate than others so the number of those in each country my skew the calculation,
  3. staff costs may vary depending on availability, and
  4. the level of supervision may vary from country to country.

I welcome your views on this method and any suggestions of improving or qualifying the calculation. Please comment below or drop me a line.

Calculation of insurance cost, SOURCE: CEA

Calculation of insurance cost, SOURCE: CEA


About Gideon Benari
Solvency II Wire a site dedicated to informing professionals in financial services industry about Solvency II, the new regulation for the European insurance industry.

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