The cost of implementing the Solvency II directive for Maltese non-life insurance companies

Abstract

Purpose: Solvency II is known as Basel II for insurance companies. The aim of this study is threefold. Firstly, to identify the changes that the Maltese non-life insurance principals must undergo to accommodate this directive. Secondly, to consider both the initial and on-going implementation cost involved. Finally, to assess whether or not the so vastly preached of proportionality principle in reality applies to the Maltese scenario. Design: The objectives of this study were reached through semi-structured interviews with financial controllers and risk officers of the five major Maltese insurance companies. Findings: The costs attached to the various changes by the participants are at this moment in time estimates of worst and best case scenarios. The biggest drain however lies with actuarial requirements. There is some inconsistency in overall implementation figures between the local companies and their European counterparts, partly due to lack of guidance and clarity of requirements. The hidden opportunity cost is also not being accounted for, and as a result the cost is perhaps being understated in real terms. Conclusions: It can hardly be said that the proportionality principle applies to Malta. The costs envisaged by local companies are relatively no less than those estimated by foreign ones belonging to the same size class, and yet boasting up to three times the gross written premiums. However these downsides should not overshadow the extensive benefits that can be achieved through better risk management practices, following full Solvency II implementation come January 2013. Value: It is hoped that this study will bring to the attention of the MFSA the need to apply the proportionality principle where there is leeway to do so, such as on reporting requirements