From influencing how trillions of euros of assets are invested to shaping levels of retirement income for millions of consumers, a planned shake-up of how insurance companies are regulated will have repercussions far beyond the industry.
Yet to the chagrin of national regulators and insurers, the new EU capital requirements – which will help determine insurance regulations as far afield as Bermuda – have been persistently delayed since being devised a decade ago. Officials drawing up the Solvency II standards believe they have reached a breakthrough with a newly issued report, six months in the making, which recommends changes are made to earlier versions of the regime.
Gabriel Bernardino, who chairs the European Insurance and Occupational Pensions Authority, says the proposals provide a “reliable basis” for Solvency II to go ahead after several false starts. But there are early signs that Solvency II’s latest incarnation could well be the subject of the same disagreements that has blighted the project for years. Allianz, Europe’s biggest insurer by market capitalisation, says the plans give “no adequate answer” for some of its concerns.
Alex Wynaendts, chief executive of Aegon, says: “These proposals, although they go some way in the right direction, are not sufficient to deal with all the outstanding issues". Privately, executives are scathing. “There’s absolutely no way it’ll get through like this”, says the head of another of Europe’s biggest insurance companies. “It’s just stupid.”
One of the biggest debates looks set to centre on a measure EIOPA has proposed known as a “volatility balancer”. This is meant to allow assurers to discount their liabilities in line with short-term fluctuations in asset prices. But the regulator is planning to use a factor of 20 per cent to calculate the discount rate. Parts of the industry had called for 75 per cent.
Paul Fulcher, managing director of asset liability management structuring at Nomura, says: “It applies to all insurance products – but is much less generous than the classic matching adjustment. Only 20 per cent of the volatility is damped which would appear to severely limit the benefit of this tool.”
Although EIOPA drafts the standards, it is up to the EU institutions to forge a deal. Even if they agree on the measures by year-end, few people in the industry expect Solvency II to be implemented before 2016. Mr Wynaendts says: “If we cannot come to a solution in the next six months then the whole process risks being significantly delayed because of the European Parliament elections".
For some observers, even this looks optimistic. Mr Fulcher says: “The more likely scenario is that instead of the hard capital requirements, we get the soft measures – such as on disclosure and risk management. We don’t really get Solvency II.”
© Financial Times
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