Insurers in Europe will make “immense changes” to their business when new risk-based rules are put in place, the chief executive officer of Gothaer Group and head of a group representing German mutual insurers said.

“Insurers will use the transitional period from Solvency I to Solvency II to change their products and to bolster capital by cutting payouts and reducing costs,” Werner Goerg, chief executive officer of Gothaer Group and head of the German association of mutual insurers ARGE, said in a telephone interview. “Once the transitional period has ended, most German life insurers will be able to fully comply with the new rules.”

Solvency II, intended to harmonize the way insurers in Europe allocate capital against the risks they take, was originally scheduled to come into force in 2012. It has been delayed several times over issues such as the treatment of long- term guarantees and may now be implemented on Jan. 1, 2016 with a transitional period.

“Against the background of the low interest rates, the transitional period will be of vital importance,” said Goerg, 56, whose mutual-insurance company is based in Cologne, Germany. “I would expect a transitional for calculating the solvency capital adequacy of about 10 years or a bit more.”

The Solvency II directive is being developed by the European Commission and the Frankfurt-based European Insurance and Occupational Pensions Authority, or Eiopa, along with national regulators.

‘Attractive Solution’

“While new business should be fully accountable under Solvency II, run-off business that no longer accepts new customers should fall under the old Solvency I rules,” Goerg said. “Many insurers would then review their books as that would be an attractive solution to solve problems that Solvency II brings to long-term guarantee business.”

The new rules require insurers to set aside more capital the longer they guarantee certain benefits such as the return of a life-insurance contract, which could run for 30 years or more. Some insurers in Germany have already closed life-insurance units for new business.

Among others, Ergo Versicherungsgruppe AG, Germany’s second-biggest primary insurer, closed its subsidiary Victoria Leben for new business in 2010. Talanx AG chief Herbert Haas told newspaper Sueddeutsche Zeitung in an interview on Oct. 1 that Germany’s third-biggest insurer is evaluating a run-off of its HDI Leben life-insurance unit among other options.

–Editors: Steve Bailey, Mark Bentley