Schwarz: Dr. Jeworrek, thanks a lot for giving us the opportunity to have a discussion on the most pressing topic of these days: Solvency II.
Under this new regime, do you see any impact on either European players abroad or on players from overseas in Europe?
Jeworrek: Interesting question. First, we have to understand that Europe is certainly ahead of the development now. But Asian and Latin America countries—for instance, Brazil— closely monitor the developments in Europe. We need an economic steering approach. But even more, Solvency II can act and will act as a role model for other parts of the world.
Schwarz: Many experts think that there will be an impact on product delivery of insurance companies, especially life insurance companies. What is your opinion?
Jeworrek: Solvency II will exactly identify which kinds of risks are diversifiable in an insurance company portfolio and which are non-diversifiable.
With this in mind, we foresee that, particularly for the life insurance business, certain products will come under pressure to change. Why? Because there are hardly any options to deal with market risk under Solvency II if you do not want to be punished.
That means [for example] long-term interest guarantees under life insurance products will probably come under pressure, and might be replaced, at least over time, by variable annuity products and others.
Schwarz: How exactly is reinsurance going to work to release capital for primary insurers?
Jeworrek: First of all, reinsurance cannot and will not measure risk in a different way. So it gains no competitive advantage by escaping from this new regime. We measure risk in an identical way.
What is then the advantage if you want to buy reinsurance? The advantage is, from an insurance company perspective, that you seed business into a better-diversified, global portfolio. And assuming the same solvency requirements, the same formulas, a well-diversified portfolio needs less capital.
If the reinsurance industry wants to be competitive and wants to be the right partner to solve the capital problems for insurance companies, then you need global, well-diversified reinsurance. Otherwise, it does not make sense—under a new capital regime—to seed business into a reinsurance portfolio that is as equally or even less diversified than my own portfolio.
And therefore diversification is a dominant factor in the future.
Schwarz: Are there differentiations if we talk about Pillar I, II or III, regarding the winners and losers?
Jeworrek: Pillar I is a part of Solvency II which deals with the quantitative issues of capital requirements. Under Pillar I here, of course, we measure diversification, we measure the impact of risk drivers to the overall solvency capital in the future. And this specific part of Pillar I will, of course, lead to different demands—either of fresh capital or reinsurance.
Under Pillar III, we deal with the reporting requirements. We have to understand that the current proposal is far too extensive. It will be an extreme burden for smaller and medium-sized players.
Schwarz: Dr. Jeworrek, thanks a lot for the very interesting interview.
Dr. Torsten Jeworrek is CEO of Reinsurance and a member of the Board of Management at Munich Re.
Dr. Gunther Schwarz is a partner with Bain & Company