European (EU) Solvency II regulations currently being considered are regulatory overkill and will hit pension annuity rates, according to the Association of British Insurers (ABI). At the beginning of last month, the Committee of European Insurance and Occupational Pensions Supervisors, (CEIOPS), issued 24 consultation papers (numbering just over 1100 pages in length) on the implementation of the Solvency II implications.
Solvency II rules look at the prudential (financial) regulation of insurers, including their capital requirements, and aim to be standardised right across the EU. The current raft of papers recommend insurance companies’ free interest rate structure should usually be based on the yield on appropriate government bonds, which is a change from early rules where swap rates were utilised. The papers set out a large number number of criteria that risk free term structures have to fulfil, the default choice being government bonds unless they cannot or do not meet one or more of these criteria. However, it does actually state that government bonds do not currently meet these set criteria. All of this will effect annuities.
Jonathan French, assistant director of media relations for the Association of British Insurers, said that the committee had probably been overly cautious about the capital adequacy of insurers and this approach would be detrimental to the whole industry. Pension annuity providers will be particularly affected by these proposed changes, he added. Here in the UK, we have an unique system of pension annuity provision and it is an issue that affects the insurance company and the customer. The committee has taken the worse case financial scenario and the most cautious approach and wants insurers to increase their capital requirements, he further commented.
As result of these proposed Solvency II regulations we might see less generous annuity rates on offer, but there are so many different factors involved. Meanwhile, while I worry about rates, consultants Towers Perrin revealed it could take over 1000 man hours of specialist resources to properly analyse, respond and train senior management on the implications of the proposed new regime. Naren Persad, one of their senior consultants, said Solvency II requirements were likely to be the number one priority for insurance companies in the next few years.
