Mutuals warm to cost of capital

A CRO Forum paper that highlights the advantages of its market-consistent cost of capital approach to smaller companies has been welcomed by the International Association of Mutual Insurance Companies (AISAM) - which represents many of the smallest insurers on the continent, and which was an earlier critic of the proposals.

Lieve Lowet, secretary-general of the association, said it was "important that the whole industry knows what is at stake - and this paper will help with this".

In February, the mutual insurers' association had complained to the European Insurance Association (CEA) and the CRO Forum that the joint proposal they had submitted to the Committee for European Insurance and Occupational Pension Supervisors (CEIOPS) hearing in January contained a "theoretical framework (that) cannot be implemented ... throughout the insurance industry".

In a letter to both groups, the association raised concerns that although the 'big 20 insurers' could conduct the necessary modelling required, "medium-sized undertakings are going to have remarkable difficulties - not to mention small insurers".

The CRO Forum's latest paper argues that, contrary to perceptions that its market-consistent cost of capital model is better suited to large companies, it was in fact easier for smaller entities, as most of the calculations required are part of the standard solvency capital requirement.

The only additional calculation required, according to the CRO Forum, is for the cost of capital on non-hedgeable risks - which according to the group contrasts favourably, and to a higher degree of accuracy, with the complex stochastic models required to calculate the percentile confidence level approach put forward by the CEIOPS.

"These are valid arguments that deserve full consideration. Our earlier concerns reflected a cautious approach to the time horizon for the proposals - not an outright rejection. We want to give our members the chance to fully consider their implications, and we are planning to survey them to see how well they understand the process."

Concerns have been raised from smaller companies over the perceived undue influence of the CRO Forum - whose members represent Europe's 13 largest insurers - on the Solvency II discussion process, but Lowet rejected these.

"Some people have said to me, 'How is it possible that 13 CROs can kidnap the agenda on this issue?'. But they are coming up with good ideas, and you cannot stop the commission listening to a compelling argument, whether or not you like what is being said."

Lowet was hopeful that the latest move by the CRO Forum will help bridge this gap in perception, but she was still critical of its lack of availability of information on the Solvency II process in languages other than English.

"Everything is in English - this hardly promotes democratic discussion does it? Nothing from CEIOPS is translated - even QIS 1 had to be translated into French in France itself, and I think if organisations are serious about including all companies in the discussion process, then action needs to be taken on this issue."