05 September 2013

Deloitte: Increasing regulation causes strategic paralysis for European insurers

• The shifting nature, increasing volume and uncertainty of new rules make it harder for insurers to take business decisions.
• High costs of compliance are estimated to reduce return on equity by one percentage point.
• Insurers need to adopt a strategic approach to dealing with regulatory uncertainty.

The report reveals:

• The top 40 European insurers are estimated to have collectively spent between €4.2b billion and €4.9 billion in 2012 complying with all new regulations. This is equivalent to a one percentage point reduction in return on equity (ROE).
• Deloitte estimates the total cost of new rules from 2010-2012 was €8 billion to €9 billion and the average cost for each top 40 insurer exceeded €200 million.
• Insurers can absorb the uncertainty around new rules more effectively by establishing an executive team to provide a comprehensive view of the impact of regulation and coordinate a firm-wide response.

Francesco Nagari, insurance partner at Deloitte, said: “The new agenda is leaving insurers stretched, uncertain and requiring new capabilities. The volume of new insurance rules has increased to a level not seen in decades. Compliance has cost the European industry billions of euros and most insurers expect the bill for implementing the new regulations - which include IFRS 4, Solvency II, IFRS 9, SIFI Rules and FATCA - to continue at current levels until at least 2015.

“However, the challenges are not simply about headline cost. Few compliance teams have the capability to deal with the uncertainty surrounding regulation and many insurers are adopting a wait and see approach when it comes to making business decisions. This can result in strategic paralysis, which means insurers may delay business plans such as acquisitions or disposals because they do not know how these decisions might be affected by new regulations.”

Seb Cohen, head of insurance research at Deloitte, said: “Senior executives say the shifting nature of regulation makes it difficult for insurers to make decisions and plan their businesses. This means the real cost is likely to be much greater than simply the initial expense of implementing the new rules.

“Our research indicates insurers would welcome regulators around the world working closely together to reduce duplication between each national supervisor. In Europe, EIOPA is examining this issue, but it is unlikely to affect rules from outside Europe. Companies, however, cannot wait for regulators to be more coordinated in the short term. There are tools and techniques insurers can use to help cope with these challenges and they need to create a coordinated firm-wide approach to regulation that does not hinder the formulation of business strategies.”

Press release

Full report

© Deloitte LLP