Many industry observers consider Solvency II to be a worthy attempt by European regulators to forge a more uniform approach to safety and soundness supervision. Its impact extends beyond Europe: It has influenced global-standard setters at the International Association of Insurance Supervisors and—though some of my former colleagues might dispute this—has even had an impact here in the U.S. at the National Association of Insurance Commissioners (NAIC).

See related blog: U.S. ORSA: What's Next?

That said, many people, particularly at the NAIC, have voiced concerns that Solvency II so far is largely a theoretical exercise rather than a tried and true regulatory regime (notwithstanding certain countries that already have moved to risk-based regulatory frameworks, such as the UK, via its Individual Capital Adequacy Standards regime). The European Commission's willingness to develop a full regime largely on paper differs from the NAIC's approach of “tweaking” the U.S. regime via the Solvency Modernization Initiative. Moreover, timelines for its completion have been extended several times—and it is fair to say that Solvency II still has a long way to go before it is final.

Compounding this lingering uncertainty about Solvency II's details is even greater and more existential concern about European strategies to overcome sovereign-debt issues in the face of a regional economic slowdown. In France, the region's second-largest economy, consumer confidence has recently sunk to its lowest level since October 2008. In Italy, the Eurozone's third-largest economy, the coupon on 10-year notes once again has eclipsed the threshold watermark of 7 percent—and recent Italian unemployment data reinforces this negative trend. And Germany, the largest and most robust economy in the Eurozone, saw retail sales dip for the second straight month and factory orders decline, both of which indicate it is not immune to the wider continental malaise.

What might the fragile state of affairs in the region and the sovereign-debt crisis mean for insurers domiciled or doing business in Europe? Notwithstanding the UK's reluctance to sign on to a new EU membership treaty in early December, a spirit of unity continues to persist among members. However, considering the challenges confronting each nation, it is reasonable to question how long this will prevail. At what point do macro-economic pressures become so great that other objectives, like a single European currency, are sacrificed in the name of economic survival, political stability and other priorities?

From a more practical perspective, can sovereign debt continue to be classified as Tier 1 capital or be deemed risk-free? How will the persistence of a low-interest-rate environment impact asset-liability management techniques and the pursuit of higher yields on savings-related products? Does the discounting of technical provisions at such low rates of interest, when they are subject to a risk margin on top of a genuine best estimate, actually result in higher levels of reserves than under an undiscounted basis?

Considering the economic uncertainty that continues to plague the Eurozone, insurers and regulators should be prepared for corresponding effects on Solvency II's development and implementation. As a former regulator, my experience is this: A regulator's first and primary duty is to the local market, and as an appointed official, you have a boss (governors, taxpayers, etc). You are sometimes compelled to take a narrow, territorial view, which can limit any esprit de corps or cooperative arrangements among peer governments.

With this in mind, it would not be terribly surprising for more immediate priorities, such as those related to the European economy and the state of the single currency, to be of primary importance to Eurozone nations. The Eurozone and the single currency are at enough risk that Solvency II's final technical rules may well need to change and its implementation be deferred even further.

Henry Jupe, Jean Connolly and Mary Ellen Coggins contributed to this article.

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Will Economic Crisis in Eurozone Affect Solvency II?

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