View more on these topics

Analysis: Insurers secure rethink on matching premium

Insurers have secured a last-ditch amendment to Solvency II rules which could prevent a 20 per cent drop in annuity rates, although concerns remain about its implementation.

There has been concern that measures put forward by the European Parliament’s Econ committee would not contain reference to a so-called “matching premium”.

The Association of British Insurers says the premium is needed to remove the requirement for insurers to take into account market volatility that they are not exposed to when the new capital requirements are implemented.

The Econ committee last week voted in favour of including the premium in its version of the Omnibus II directive’s text.

However, officials at the ABI are concerned that restrictions on asset allocation put forward alongside the matching premium will limit the effectiveness of the proposals.

ABI director general Otto Thoresen says: “The measures agreed in the Econ committee of the European Parliament are far from perfect but pave the way for a constructive discussion in the next phase of negotiations on Solvency II. We urge the finance ministers, the European Parliament and the European Commission to work together in the weeks to come to address the outstanding issues.

“It must remain possible for insurers to continue to deliver products with long-term guarantees that are attractive to consumers. These are products that people rely on for their income in retirement.

“The final text must not constrain European insurers from competing successfully in the global market. The issue of equivalence must be resolved in order for the EU insurance industry to remain competitive and this will be an issue for which we, and our European counterparts, must seek a successful regulatory outcome.”

Experts say failure to include the matching premium in the final Solvency II rules would force insurers to hold an additional £50bn in capital.

The ABI says this could translate into a 10 to 20 per cent drop in annuity rates.

Deloitte insurance partner Richard Baddon says: “The UK insurance industry has lobbied hard for the matching premium, which will allow it to continue offering consumers affordable annuities. While this is a major step forward, there are still regulatory uncertainties and the industry must keep lobbying and not rest on its laurels.

“Currently, when pricing and reserving for products such as annuities, insurers discount future policyholder liabilities allowing for a margin above risk-free interest rates. In 2008, Solvency II proposals took an approach that did not allow for this margin and which would have significantly increased capital requirements.

“Estimates suggested that there would be a capital shortfall of as much as £50bn. This would have put extreme pressure on the industry and reduced annuity payments for new pensioners.”

What is the matching premium?

It is an adjustment to the value of long-term liabilities held by insurers, such as annuities, to take account of assets they already hold.

What does it do?

The ABI says including the matching premium in Solvency II rules will prevent insurers being exposed to day-to-day fluctuations in the bond market. It says this should be the case because insurers hold assets until maturity.

Why is it needed?

The ABI says without the matching premium, pension providers would need to hold an estimated £50bn in capital to protect against “non-existent” spread risk. Experts believe that without the matching premium, this increase in capital could translate into a 10-20 per cent fall in annuity rates.

Recommended

MMR too focussed on brokers, says BSA

The Building Societies Association has criticised the mortgage market review’s stance on full advice as being too focused on brokers, with lenders an afterthought. It warns that there could be a risk that consumers may become less engaged if they are forced to take advice even if they do not require it and pay less […]

4

Scot Life says providers snubbed decency limits on adviser-charging

Scottish Life says providers roundly rejected an FSA suggestion that decency limits on adviser-charging should be introduced. Speaking at a Money Marketing RDR invitational event in London last month, business development manager Fiona Tait said the regulator wanted providers to report advisers who were taking excessive adviser charges from products. Tait said: “The FSA did […]

9

Chris Gilchrist: The collapse of financial theories

Most of us have some painful memories of the 2007-08 crunch. It is not surprising that most people in the business are keen to forget and to resume business as usual. This will not happen and if you believe it is happening now, you are heading for trouble. One of the reasons we had the […]

BlackRock international retail head joins Jupiter

Jupiter has hired BlackRock head of international retail Maarten Slendebroek as distribution and strategy director. Slendebroek, who will also join the board as an executive director, is expected to join the firm in the second half of 2012 and will report to Jupiter chief executive Edward Bonham-Carter. Slendebroek has over 25 years experience in financial […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment