23 April 2014

Risk.net: Insurers at the mercy of politicians

Insurers received a sharp reminder recently of their vulnerability to political risk. Pension reforms led to an immediate and, in some cases, precipitous drop in UK insurance company share prices when George Osborne announced an end to compulsory annuitisation of defined contribution pension funds.

A planned review of closed books by the UK’s Financial Conduct Authority (FCA), leaked a week later led to a second drop, although clarification on the terms of the review caused share prices to recover some of the losses quickly. On this occasion it has been UK insurers to suffer, but there are examples of similar episodes elsewhere in the past. A tax change in the Netherlands in 2007, for example, enabled banks to compete on level terms with insurers in the life savings market and caused the position of insurers in that market to collapse.

Of course, the industry is deeply familiar with a degree of political and regulatory risk, owing to the Solvency II legislative process in Europe and the more recent development of international capital standards under the ComFrame and G-Sii initiatives. Even so, the unexpectedness of the UK’s Budget announcement and the degree to which it affected share prices for certain insurers shows how damaging such events can be.

There is no comprehensive way for insurers to protect themselves against such risks, but differences in the share price performance of individual insurance companies show the extent to which business diversification might at least help. Specialist annuity providers Partnership Assurance and Just Retirement experienced drops of 53 per cent and 43 per cent respectively on the day of the Budget announcement. Legal & General’s (L&G) share price fell by 8 per cent on the day. The conclusion – that bigger, more diversified organisations have a competitive edge over smaller, more focused companies when facing political and regulatory risk – can be seen also in the wider context.

An overarching concern of insurance companies is that the spirit of Omnibus II should be reflected in the lower levels of implementing legislation, in particular that further rulemaking and local regulatory actions should stay true to the concept of proportionality.

The concern is greater for smaller firms, and it seems likely that bigger companies will adjust more easily to the new rules. With 2016 approaching, the consolidation of the industry in Europe as a result is expected to gather pace.

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