Deloitte capital markets partner Andrew Smith says: “Annuity providers would still be able to invest in corporate bonds but under the proposals they can no longer use the higher expected returns on those bonds as a rationale for holding less of them.”
For existing annuity business, the paper proposes requiring insurers to top up their capital. Smith expects this to hit bulk annuity providers hardest.
To recoup some of this extra cost, the price of new business is expected to shoot up and Paternoster chief executive Mark Woods suggests this could be by as much as 20 per cent.
Smith believes this is “massively overstated” and considers that 5 per cent would be a more accurate estimate.
An ABI spokesman says: “At this stage, it is impossible to predict how Solvency II would affect annuity rates.”
Fitch senior director David Prowse says the paper acknowledges the industry’s trepidation, adding that fierce industry lobbying will continue.
He says: “The paper recognises that ‘some Committee of European Insurance and Occupational Pensions Supervisors members do not fully share this view and believe that this issue requires further investigation’, which suggests that the current position is not necessarily the position that will be agreed for implementation from 2012.”